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Treasury Refunding Announcement Is a Rare Nail-Biter for Traders

  • Auction sizes are expected to rise for the first time in years
  • Forecast ranges are especially wide for 2- and 3-year notes

The U.S. Treasury’s quarterly refunding announcement on Wednesday is shaping up to be the most interesting in years.

Everyone with an opinion expects the department to boost the sizes of at least some auctions in February to accommodate a growing budget deficit and the Federal Reserve’s initiative to shrink its balance sheet by allowing some holdings to mature. There’s a range of views, however, about how much and whether the increases will extend to the 10- and 30-year auctions.

If they do, it may deepen a selloff that’s driven 10-year yields to the highest since 2014, and potentially halt one of the bond market’s dominant trends -- the flattening of the yield curve to levels last seen a decade ago. And this week’s announcement is probably just round one, the first step toward a ramp-up of supply that’s expected to cause issuance to at least double this year to more than $1 trillion.

“They’ve got a lot of wood to chop,” said John Fath, managing partner at BTG Pactual Asset Management and a primary dealer trader from 1993 to 2008. “We haven’t been in a position where net issuance was going up so dramatically. That gives Treasury a lot of room to maneuver.”

Starting Short

The Treasury said in November that it expected to boost coupon auctions this quarter. Many dealers project the increase will start with shorter maturities, before moving out the curve.

For the February two-year auction, which has been $26 billion since January 2015, forecasts range from $27 billion to $32 billion. For the three-year -- $24 billion since January 2015 -- projections range from $25 billion to $28 billion.

When it comes to the 10- and 30-year, predictions are clustered more tightly, with most seeing either no change this quarter or increases of $1 billion per monthly auction. Wells Fargo & Co. stands out by predicting increases of $2 billion per monthly auction to offset the impact of higher bill issuance on the portfolio’s weighted average maturity. Treasury said in November that it wanted to keep the average maturity of the government’s debt stable.

Market Mover

As far as market-moving potential, there’s more risk from an announcement on longer maturities, Fath said. The decision on two- and three-year notes is unlikely to have much sway despite the wide forecast ranges, especially if the sizes are at the high end, which would be less surprising than numbers at the low end, he said.

“What would shock the market most is if they blew out the size of the bond or the 10-year,” Fath said.

The announcement at 8:30 a.m. Washington time on Wednesday will include sizes for the 3-, 10- and 30-year auctions set for Feb. 6-8. It may reveal the amounts of the 2-, 5- and 7-year auctions set for Feb. 20-22, or merely discuss the size in general terms ahead of the official release on Feb. 15, said Lou Crandall, chief economist at Wrightson ICAP.

Here are primary dealers’ February auction-size forecasts:

2Y3Y5Y7Y10Y30Y
Bank of Nova Scotia282634282315
BNP Paribas282636302416
Barclays272535282315
Bank of America282635292416
Cantor Fitzgerald282636292416
Citigroup282635292416
Credit Suisse322839282315
Daiwa272535292416
Deutsche Bank282635292416
Jefferies282636282315
JPMorgan272535292416
Morgan Stanley2725352416
NatWest282635292416
Nomura282635292416
RBC272535292416
Societe Generale282635282315
TD272535292416
UBS302835282315
Wells Fargo262517

NOTE: Primary dealers not included either declined to provide forecasts or didn’t respond to requests.

— With assistance by Liz McCormick

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