The U.S. Treasury Department said it will trim the size of two- and three-year note auctions starting this quarter as a shrinking budget deficit gives the government scope to reduce borrowing.
Three-year note sales will decline to $29 billion in May, $28 billion in June and $27 billion in July, from the current level of $30 billion, a Treasury official told reporters in Washington today. Auctions of two-year notes will drop to $31 billion in May, $30 billion in June and $29 billion in July, from $32 billion, the official said.
“Deficits keep coming down and that makes the Treasury cut the coupon issuances,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York. “Better tax receipts are helping lower the deficit, so Treasury doesn’t need to issue as many bonds.”
The nation’s budget deficit will narrow to $492 billion this year, about a third of its 2009 record level of $1.4 trillion, the Congressional Budget Office said on April 14. Next year, the gap will decline further, to $469 billion, the nonpartisan agency said.
Treasuries rose after a government report released at the same time as the refunding details showed the U.S. economy slowed more than forecast. The yield on the benchmark 10-year Treasury note fell 2 basis points, or 0.02 percentage point, to 2.67 percent at 10:49 a.m. in New York.
Matthew Rutherford, the Treasury’s assistant secretary for financial markets, said in a press conference that tax receipts around the April 15 filing deadline have been “pretty strong” compared with a year ago.
“We’re still getting incoming information from the April tax season, so we’ll learn more in the days and weeks ahead,” Rutherford said. “But that was certainly a part of our overall decision and I think we were confident that we would be able to reduce our borrowing as a result of it.”
The fiscal improvement will allow the U.S. to pay down $78 billion in net marketable debt from April through June, the biggest quarterly reduction in seven years, the Treasury said on April 28.
“We have made more progress reducing the deficit at a faster speed than any time since the end of World War II,” Treasury Secretary Jacob J. Lew told a House Appropriations subcommittee yesterday.
Auctions next week of notes and bonds will decline to $69 billion, compared with $70 billion last quarter. The sales will raise $9.7 billion in new cash.
The Treasury will sell $29 billion in three-year notes on May 6, $24 billion in 10-year notes on May 7, and $16 billion in 30-year bonds on May 8, according to today’s statement.
“All members agreed that Treasury remained overfunded in the near term and could begin a gradual set of cuts,” the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association, said in minutes of a meeting yesterday.
The panel, known as TBAC, also recommended that the Treasury consider increasing cash balances to mitigate situations in which normal access to funding markets might be disrupted, as was the case after the Sept. 11, 2001, attacks and following Superstorm Sandy in 2012.
“The Committee agreed that Treasury should present a proposal for a cash-balance framework that better accounts for these risks at the August meeting,” the minutes of the panel said.
“TBAC suggested that this proposal include possibilities regarding potential ways to fund such a liquidity buffer,” the minutes showed. “The Committee was also supportive of Treasury’s examination of other tools to manage its volatile maturity profile, including potential changes to the issuance calendar, buybacks, and switches.”
Rutherford said the Treasury and the TBAC discussed the possibility of buying back securities, which was last pursued more than a decade ago during periods of declining deficits and, in some years, budget surpluses. Buybacks were suspended in April 2002.
While buybacks can also be used to manage maturity profiles, he said there are no imminent plans to reintroduce them.
The Treasury has been increasing the proportion of long-term debt and cutting the share of short-term bills in its overall portfolio to lock in low interest rates for as long as possible. The bill supply represents the lowest share of Treasury debt outstanding since the 1950s, economists Ward McCarthy and Thomas Simons of Jefferies LLC said in an April 25 note.