Treasury sticks to issuance plans despite Wall Street's fiscal warnings

Adds context, analysts

By Karen Brettell and Davide Barbuscia

Feb 5 (Reuters) - The U.S. Treasury expects to keep most of its debt issuance plans unchanged for the next few quarters, despite some market speculation that new Treasury Secretary Scott Bessent would moot the possibility of more long-term debt issuance to fund deficits.

The Treasury said on Wednesday it anticipates keeping the sizes of its coupon and floating rate note auction steady for at least the next several quarters, but will continue to incrementally increase the size of its Treasury Inflation-Protected Securities (TIPS) auctions.

Some bond market participants had expected the quarterly refunding announcement, the first under Bessent, would tweak its language to reflect a possible rise in long-term debt later this year. The Treasury has used the same guidance for one year now.

"The surprise was really them not changing any of the guidance," said Jan Nevruzi, U.S. rates strategist at TD Securities. "There was chatter that they're going to term out the debt and that might happen even faster with this new team that's in place ... Now it seems that that's been pushed back even further," he said.

In a letter to Bessent on Tuesday, the Treasury Borrowing Advisory Committee, a group of banks and investors that advise the government on its funding, said the Treasury should modify its guidance on future debt issuance, or drop it altogether "to reflect the uncertain outlook".

"Members noted elevated uncertainty regarding macroeconomic developments and the fiscal trajectory," the letter said, anticipating a $1.5 trillion funding shortfall over the next three years.

But in a virtual press conference on Wednesday, Acting Assistant Secretary for Financial Markets Brian Smith said current auction plans left the Treasury "well positioned" to address potential changes in its borrowing needs.

TAX CUTS

Analysts expect more debt issuance will be needed to fund the renewal of tax cuts that U.S. President Donald Trump, who returned to the White House on Jan. 20, signed into law during his first term in 2017 and are due to expire later this year.

Barclays analysts have estimated a funding gap of $2 trillion in the 2026 fiscal year, which begins on Oct. 1 and ends on Sept. 30 of the following year, if all the 2017 tax cuts are renewed and net long-term debt issuance remains unchanged.

"Tweaking the guidance at this meeting would give the market ample notice, reducing the risk of disruption around the actual increase," they said in a note on Tuesday, ahead of the refunding announcement.

"Repeating the guidance at this juncture, which is so far forward looking, risks giving a false sense of certainty, when there is high uncertainty about the budget outlook," they wrote.

Some bond investors expect an increase in long-term debt could spark a selloff in the bond market, similarly to what happened in 2023 when benchmark 10-year yields hit 5% as investors braced for more government debt supply.

After that selloff, the Treasury announced it would slow the pace of auction size increases of long-dated debt securities, a move that gave relief to bond markets rattled by previous increases in long-term debt supply.

That move, however, sparked criticism from some Republican senators who last year accused the Treasury of having deliberately increased issuance of short-term Treasury bills to give the economy a "sugar high" ahead of the elections.

Bessent also criticized the Treasury at the time for relying heavily on short-term debt issuance.

For the time being, Wednesday's announcement contributed to pushing long-term yields lower. Benchmark 10-year yields were last at 4.42%, down some nine basis points from Tuesday.

"I think broadly the expectations were between August and November, and now they've certainly been pushed back, I think that supported longer-dated yields a little bit," said Nevruzi at TD Securities.

The Treasury said it would increase the 10-year TIPS reopening in March by $1 billion to $18 billion and raise the five-year TIPS new issue auction in April to $25 billion.

It also plans to sell $125 billion in its quarterly refunding next week, which is expected to raise $18.8 billion in new cash and refund $106.2 billion in securities. This will include $58 billion in three-year notes, $42 billion in 10-year notes and $25 billion in 30-year bonds.

The government also noted that there will be “greater-than-normal variability in benchmark bill issuance and significant usage” of cash management bills until the U.S. debt limit is raised or suspended.