The US Treasury's quarterly refunding statement on Wednesday will be the first in a cluster of highly anticipated releases this week, as investors question where further cuts in Treasuries issuance will come as the government heads into another round of negotiations over the debt ceiling.
The Treasury has been slashing issuance of Treasury bills as it accumulates more cash from higher tax receipts, and some analysts are questioning if the cuts will extend to Wednesday's announcement of planned sales of coupon-bearing debt. The government needs to reduce its cash balance by around $100 billion by May 18, when the suspension over the debt ceiling will expire. This is because the suspension agreement forbids the Treasury from building up a cash buffer that could be used to delay a debt limit increase after that date, according to a report by Bank of America.
The government may also use its refunding announcement to announce its plans to issue its first floating-rate notes, with a first sale of two-year floaters seen as likely to make an introduction later this year. "We expect the Treasury to announce the initiation of a floating rate note program," said Ira Jersey, interest rate strategist at Credit Suisse in New York.
The Treasury has been preparing to introduce floating-rate debt in a bid to entice investors to keep buying its debt even as rates go up. Jersey sees it as unlikely that the Treasury will cut issuance of coupon debt, though it is possible it may make small cuts to two- and three-year supply in order to make room for new floating-rate supply. A jump in debt maturing over the coming years, however, may lead the Treasury to keep issuance sizes steady, Jersey said.
Further cuts in bill sales may add a bid to shorter-dated notes including two- and three-year debt and send some bill yields negative over the coming weeks. The volume of outstanding bills has declined $105 billion since April 12. "As they cut supply it's very likely that bills could be trading at negative rates in the next few weeks," said Jersey. The Treasury said on Monday that the government will pay down debt in the second quarter for the first time since before the economic crisis.
The reduced supply, more data that pointed to a weakening economy and month-end buying helped send benchmark 10-year Treasuries yields to fresh four-month lows of 1.638 percent earlier on Tuesday. "The most concerning aspect was the drop in the employment component," said Wilmer Stith, co-portfolio manager of the Wilmington Broad Market Bond Fund in Baltimore, Maryland. "That certainly was not an encouraging sign for this Friday's payrolls report."
Ten-year note yields came back to trade little changed on the day at 1.675 percent on Tuesday as investors prepared for Apple's record-breaking $17 billion debt sale, the largest non-bank bond deal in history. The Fed bought $5.13 billion in notes due 2017 on Tuesday as part of this program.
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