U.S. Treasury Keeps Size of Two-, Three-Year Note Auctions

The U.S. Treasury Department said it will maintain the size of its two-year and three-year note auctions and also keep the amount of longer-term bond issuance unchanged from the previous quarter.

The Treasury will auction $27 billion in three-year notes on Aug. 12, $24 billion in 10-year notes on Aug. 13, and $16 billion in 30-year bonds on Aug. 14, the department said in its quarterly refunding statement released today.

Next week’s auctions of notes and bonds will fall to $67 billion, compared with $69 billion last quarter. The sales will raise $9.3 billion in new cash.

“Based on current fiscal forecasts, coupon auction sizes will remain steady going forward,” the department said in a statement today in Washington. “Treasury will continue to monitor projected financing needs and make appropriate adjustments as necessary.”

Treasury, which reduced two-year and three-year auction sizes by $1 billion a month each from May to July, should maintain the issuances at last month’s levels to build “structural cash”, the Treasury Borrowing Advisory Committee said in the documents released today. The TBAC also pointed to an expected funding shortfall beginning in fiscal year 2016.

“What they are essentially doing is trying to make a case for a bigger cash cushion for the Treasury, which would essentially smooth their funding needs over the near to medium term,” said Millan Mulraine, deputy head of U.S. research and strategy at TD Securities USA LLC in New York. “It’s a cautionary approach that they are taking.”

More Cuts

Wall Street bond dealers had expected continued cuts in the issuances of two- and three-year Treasuries as the government’s borrowing needs decline amid improvement in the economy, according to a survey of 22 primary dealers.

The Treasury said it’s reviewing its cash-balance policy after the TBAC recommended increasing its cash cushion. It is conducting the review after events such as Superstorm Sandy and the Sept. 11 terrorist attacks disrupted debt auctions.

The committee, which represents investment funds and banks, discussed the historically low levels of volatility in financial markets and concluded that “monetary policy and regulatory changes have contributed to the decline.”

“Liquidity providers have declined in number and capacity, making the system less able to deal with unexpected volatility,” according to minutes of the panel’s Aug. 5 meeting.

Volatility Measures

Bank of America Corp.’s Market Risk Index that uses options to forecast fluctuations in equities, currencies and bonds reached minus 1.35 last month, a record low. A negative number means lower-than-normal volatility expectations based on data going back to 2000.

Bank of America Merrill Lynch’s MOVE Index, a measure of traders’ expectation for the pace of swings in bond yields based on volatility in over-the-counter options on Treasuries maturing in two to 30 years, was 56.68 yesterday. That’s down from a high over the past 12 months of 114.19 reached in September 2013.

Separately, Treasury said today that dealers offered mixed reactions to the idea of selling securities with maturities of more than 30 years.

“There’s some broad concern about how the securities would be, you know, basically, distributed, would they need to warehouse the risk in an era where we know dealers’ balance sheets aren’t as large as they once were,” Assistant Secretary for Financial Markets Matthew Rutherford said today at a press conference.

‘Some Concern’

“There was some concern that, if you went down this path, it may not be the best source of financing for Treasury,” he said.

Treasury will monitor how the Federal Reserve handles its $4.4 trillion balance sheet when beginning to withdraw record stimulus, Rutherford said. Specifically, Treasury will track how redemption of Treasury securities by the Fed would influence Treasury’s cash flow, he said.

“It is something that we have to watch very closely, because the amount of maturing securities each year between 2016 and 2020 is quite large,” Rutherford said.

The Treasury said today it will conduct small-scale buybacks this fiscal quarter to test information-technology systems. It said the buybacks don’t signal any change in policy.

This fiscal quarter runs from August to October.

Tensions Escalating

Treasuries advanced, pushing 10-year yields to the least since May, as concern that tensions between Russia and Western nations over Ukraine are escalating boosted investor demand for haven assets. The benchmark 10-year yield dropped two basis points, or 0.02 percentage point, to 2.46 percent as of 11:43 a.m. in New York, according to Bloomberg Bond Trader data.

Treasury’s borrowing needs this quarter fell to the lowest level for the period since 2007 as a stronger economy boosts tax revenue.

The U.S. economy grew at a 4 percent annualized rate from April through June. That pace matched the average growth rate from July through December of 2013, which was the strongest six months in a decade.

The 2014 budget deficit is projected at 2.8 percent of gross domestic product by the Congressional Budget Office. It is down from 9.8 percent of GDP in 2009, when President Barack Obama took office.

The $365.9 billion budget shortfall from October through June compared with a $509.8 billion gap in the same period a year earlier, according to the Treasury Department.

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