Title: Government Reacts to Surge in 10-Year Treasury Yields, Emphasizes Short-Term Debt Issuance
Subtitle: US Treasury Department plans to alter debt issuance strategy following the significant increase in long-term yields
Date: [Insert Date]
By [Author’s Name]
The US government is responding to the recent spike in 10-year Treasury yields, as revealed in the “Quarterly Refunding” documents released by the Treasury Department. These documents outline the government’s plans to issue debt to refinance maturing debt and address growing deficits in the fourth quarter of 2023 and the first quarter of 2024.
On Monday, the total amounts of marketable debt to be issued in these periods were disclosed, with $776 billion planned for Q4 and $816 billion for Q1. Further details regarding the composition of the new debt, particularly its maturity dates, were released today.
The last set of Quarterly Refunding documents, published on August 2, triggered a significant surge in the 10-year yield, which rose by 120 basis points — from about 3.8% in early July to a brief peak of 5% on October 23. This surge appears to have unsettled the government, prompting today’s recommendation from the Treasury Borrowing Advisory Committee (TBAC) to decrease the issuance of longer-term securities.
Under the revised plan, greater emphasis will be placed on the issuance of short-term Treasury bills, spanning from one month to one year, as well as on 2-year and 5-year notes. Compared to the August 2 plan for the same period, the new recommendations include an additional $11 billion for 2-year notes and $10 billion for 5-year notes over the next six months.
The TBAC’s issuance recommendations, depicted in a chart within the released documents, illustrate a reduced projection for the issuance of 3-year notes through 30-year bonds, excluding Treasury Inflation-Protected Securities (TIPS) and Floating Rate Notes (FRNs).
Additionally, the TBAC estimates a surge in Treasury bill issuance, amounting to $460 billion in Q4 and an additional $586 billion in Q1. This increase would result in a combined total of $1.05 trillion over just two quarters. At the end of Q3, $5.26 trillion in T-bills were outstanding, and with the additional issuance, this figure is expected to reach $6.31 trillion by the end of Q1 2024.
Furthermore, the TBAC’s report delves into the various factors contributing to the surge in longer-term yields. It highlights a range of causes, including stronger-than-expected economic activity, changing expectations regarding monetary policy, higher real yields, the impact of ballooning debt, the Fed’s Quantitative Tightening (QT) program, and Fitch’s downgrade of the US long-term rating.
The report also emphasizes the potential impact of foreign investors and central banks, as well as investors’ miscalculations and reduced bank interest in Treasury holdings. Furthermore, it points out early signs of waning demand in Treasury auctions, as well as the possibility that investors now require a higher yield premium to hold longer-term debt.
As the government reacts to the surge in 10-year Treasury yields, it will prioritize short-term debt issuance and adjust its debt management strategy accordingly. These changes aim to address the evolving economic landscape and mitigate potential risks associated with the previously observed yield increases.