U.S. to Sell $70 Billion of Long-Term Securities Next Week

The U.S. Treasury Department kept quarterly sales of longer-term notes and bonds unchanged at $70 billion and signaled it may make “modest” reductions in coupon auction sizes as the nation’s fiscal outlook improves.

Stronger revenue and a smaller projected budget deficit suggest the U.S. will be overfunded this fiscal year, said a Treasury official who spoke to reporters on condition of not being further identified. The department is waiting for a few more months of data during tax-filing season before making any cuts in longer-term debt sales, the official said.

“Odds are we might get some auction cuts next quarter,” said Gennadiy Goldberg, a U.S. strategist at TD Securities USA LLC in New York. “The improvement in Treasury finances, increased revenues and more certainty for them on the budget would clear the way for them to actually start cutting auction sizes.”

The U.S. budget deficit this year will be the smallest as a share of the economy since 2007 as stronger growth boosts tax revenue, the Congressional Budget Office said yesterday. The projected shortfall will be 3 percent of gross domestic product, down from 9.8 percent of GDP in 2009, which was the widest in records dating back to 1974, the agency said.

Quarterly Auctions

In a statement today in Washington, the Treasury said it will sell $30 billion in three-year notes on Feb. 11, $24 billion in 10-year notes on Feb. 12 and $16 billion in 30-year bonds on Feb. 13. The auctions will raise about $9.2 billion of new cash, it said.

The balance of the government’s financing needs are met with weekly bill auctions, cash management bills, monthly note and bond auctions, and sales of inflation-protected and floating-rate securities.

“Treasury intends to maintain coupon issuance sizes at current levels over the coming quarter,” the department said in the statement, referring to sales of notes and bonds. “In light of the improving fiscal outlook, however, Treasury will continue to monitor projected financing needs and will consider further modest reductions in coupon auction sizes.”

The Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association, in a letter to Treasury Secretary Jacob J. Lew today, said coupon reduction should be focused on two- and three-year notes, “potentially beginning in the April-to-June 2014 quarter.”

TIPS Calendar

After considering changes to sales of five-year Treasury Inflation-Protected Securities, or TIPS, the department said it will maintain the schedule “until further notice.”

The department weighed changing five-year TIPS sales to make auctions smaller and more frequent to improve liquidity while lowering the cost of debt funding.

Today the Treasury said it will maintain gross TIPS issuance for 2014. Inflation-indexed notes pay interest at lower rates than nominal Treasuries on a principal amount that’s linked to the Labor Department’s consumer price index.

The Treasury’s debt management is clouded by a congressional debate over the federal debt ceiling, which is suspended through Feb. 7. If it’s not raised or suspended again by that day, the department will have to use extraordinary accounting measures to extend its borrowing authority.

“Based on our best and most recent information, we believe that Treasury is likely to exhaust extraordinary measures in late February,” the department said in the statement today.

Borrowing Needs

Earlier this week, the Treasury said it plans to borrow $19 billion more this quarter than previously estimated because of a higher forecast cash balance at the end of March.

Issuance of net marketable debt will be $284 billion in the January-to-March period, compared with $265 billion forecast on Nov. 4. The Treasury expects an end-of-March cash balance of $130 billion.

Next quarter, the department said it plans to pay down $40 billion of debt, benefiting from higher budget revenue and anticipating narrowing fiscal deficits. That would be the biggest paydown since the second quarter of 2007.

The Treasury’s first sale of floating-rate notes on Jan. 29 was met with robust demand as investors sought the $15 billion in floating-rate notes as an alternative money-market security.

Reopenings will be issued in a range of $12 billion to $15 billion, the department said today.

The Treasury plans to sell more floating-rate notes in April, July and October, with two reopenings in the subsequent months of each quarter.

The floating-rate note auction “went extremely well” and attracted a “diverse set of buyers,” Matthew Rutherford, the department’s assistant secretary for financial markets, said at a news conference today. While he said the Treasury would be open to the possibility of adding different maturity lengths for floating-rate notes, it’s “not on the agenda right now.”

Before it's here, it's on the Bloomberg Terminal.