In addition, the announcement on Wednesday is likely to include larger auction sizes for securities across the yield curve, with potential exceptions for less popular notes. Market participants will also be looking out for updates on a forthcoming program to repurchase older Treasuries. The need for public borrowing has increased due to Federal Reserve rate hikes, which have pushed its policy benchmark to a 22-year high, resulting in higher yields on government debt and increased costs. Furthermore, the Fed’s reduction of its Treasury holdings has led to bigger government sales to other buyers, magnifying the potential for greater volatility during securities auctions.
Mark Cabana, head of US interest-rate strategy at Bank of America Corp, highlighted the substantial increase in supply, expressing surprise at the deficit figures. Historically, larger debt issuances have not directly translated into lower prices and higher yields, especially in a low-yield environment over the past two decades. However, larger auction sizes may contribute to short-term volatility, particularly as banks have reduced their market-making activities. The recent seven-year auction demonstrated this, with buyers demanding a higher discount to absorb the securities.
The primary factors driving yields higher are Federal Reserve rate hikes and inflation, which have widened the budget deficit. The cost of servicing US government debt has increased by 25% in the first nine months of the fiscal year, amounting to $652 billion. This trend is not unique to the US and reflects a global phenomenon of increased public borrowing.
Cabana and his team expect the Treasury to increase sales of coupon-bearing debt, not only this month but also in the November and February debt-management policy announcements. Market dealers project a lift in issuance across various maturities, with most anticipating a $2 billion increase for each, although some anticipate smaller increases for 7- and 20-year Treasuries due to weaker demand.
Certain dealers speculate that the 20-year bond will maintain its current size, as it has struggled with pricing and liquidity issues since its relaunch in 2020.