US Treasury’s tapering seen outpacing Fed, with $1tn in cuts

The US Treasury Department in Washington, DC. The Treasury, for the first time in more than five years, will likely unveil a scaling down of its behemoth quarterly sale of longer-term securities.

The Federal Reserve won’t be the only one announcing a taper on Wednesday. The Treasury Department, for the first time in more than five years, will likely unveil a scaling down of its behemoth quarterly sale of longer-term securities. In time, the Treasury’s reduction in issuance of coupon-bearing debt – notes and bonds with interest payments – will outweigh the Fed’s zeroing out of its quantitative-easing purchases of Treasuries. It’s a dynamic that hasn’t captured sufficient attention from investors, according to Wells Fargo & Co, and could help limit increases in borrowing costs as the central bank withdraws stimulus. Sales of regular coupon-bearing debt will be pared back by some $1tn by about the third quarter of 2022, according to a number of Wall Street banks. By comparison, Fed Chair Jerome Powell has said the central bank’s $80bn-a-month in Treasuries purchases will be completely terminated by mid-2022. The reductions are expected to start with auctions at the so-called quarterly refunding next week, which is forecast to total less than the record $126bn of the past three episodes. While the Treasury’s exact borrowing needs will depend in part on two longer-term fiscal packages that Congress aims to enact in coming weeks, the US budget deficit is now on a downward path – making the record auction sizes put in place last year to fund pandemic relief unnecessary. “Under a relatively wide range of plausible outcomes for the fiscal packages being negotiated, the current auction schedule will result in substantial over-funding for Treasury,” said Praveen Korapaty, chief rates strategist at Goldman Sachs Group Inc. “And these issuance reductions will largely offset the expected loss of demand from the Fed as it tapers asset purchases.” The Treasury’s Wednesday release, coming just hours before the Fed’s policy announcement, will cover details of the department’s November quarterly refunding sales. Those include 3-, 10- and 30-year debt, as well as plans for any changes in Treasuries issuance over the coming months. Primary dealers’ expectations for the auctions centre around $119bn to $120bn in total. Issuance plans are expected to assume that Congress will lift the federal debt ceiling, which on the basis of currently legislated limits is likely to prevent further borrowing at some point, from as soon as early December. Treasury Secretary Janet Yellen said Democrats should be open to acting on their own to address the debt ceiling, the Washington Post reported. “Once again, Treasury is faced with making financing projections with uncertainty over government spending,” Jefferies analysts Thomas Simons and Aneta Markowska wrote in a note. They referred to the outstanding need to boost the debt limit and the lack of clarity about any potential deficit financing tied to a $1.75tn social-spending bill Democrats are trying to pass. Still, dealers generally expect the Treasury to follow the advice of its borrowing committee – a group comprising dealers, investors and other stakeholders – which recommended in August reductions to all maturities starting in November, with heavier cuts for 7- and 20-year Treasuries.