U.S. Cuts Quarterly Debt Sale, May Do So Again Even With Fed QT
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The Treasury Department said in a statement Wednesday that it will sell $103 billion of long-term securities at auctions next week -- down $7 billion from February. This marks the longest string of quarterly cuts since a 2014-2015 cycle. In a surprise for some dealers, it’s also trimming sales of two-year, three-year and five-year auctions in coming months.
“The issuance plans announced today leave Treasury well positioned” with regard to necessary borrowing, the department said in its statement. However, “additional reductions in future quarters may be necessary depending on future developments in projected borrowing needs.”
The Fed hiked by 50-basis points today as expected and suggested 75 basis point hikes are not being actively considered. The pace of quantitative tightening will initially be slower than initially expected. It will start on June 1st at $47.5 billion and ramp up to $95 billion over the next quarter instead of starting at $95 billion now.
The benefit of an economy that continues to spend is tax receipts are healthy. Together with the inability of the government to pass further big spending measures the quantity of new bonds could moderate further. Since the Fed is going to run off its balance sheet at a somewhat slower pace, than initially expected, that helps to support Treasury prices.
When the Fed reduced the size of the balance sheet in 2018 bond yields initially rallied. The removal of a major buyer sent prices lower until the higher yield attracted new demand. As the process of quantitative tightened persisted, yield peaked in late 2018 just above 3% and halved over the next nine months. That was in response to slowing growth and deflationary fears.
Bond yields have raced to retest the 3% level in anticipation of rate hikes and as short-term oversold condition is clear in the charts. At least some steadier action is overdue.
The acceleration in bond yields weighed heavily on the growth sector in particular. Any sign of demand returning for bonds will also feed through into demand for more speculative assets. The Nasdaq-100 rebounded impressively following the Fed statements to confirm near-term support at the lower side of its range.
The Dollar is also unwinding its short-term overbought condition.