US Treasury steady on auction sizes; dealers flag funding shortfall next year

By Gertrude Chavez-Dreyfuss

NEW YORK, Feb 4 (Reuters) - The U.S. Treasury said on Wednesday it does not expect to lift auction sizes for notes and bonds for several more quarters, matching market expectations, as it outlined a $125 billion refunding for February to April 2026.

The package will raise new cash of $34.8 billion from private investors for the quarter.

Thomas Simons, chief U.S. economist at Jefferies, said in a research note that the main takeaway from the announcement was the Treasury's guidance that auction sizes will be maintained for the next several quarters, after hinting at possible changes in November.

"Treasury is cognizant of the likelihood that strong demand for bills will be persistent, so they can rely on front-end issuance to meet most deviations from their expected financing needs for a while to come," Simons added.

The minutes of the meeting on Tuesday of the Treasury Borrowing Advisory Committee (TBAC), which were released on Wednesday, also caught the market's attention. They provided estimates from primary dealers of a $1.1 trillion shortfall for the 2027-2028 fiscal year, as well as expectations of the timing of the next increases in auction sizes for notes and bonds.

In a statement, the Treasury said it continues to evaluate future increases to auction sizes for nominal coupons - Treasury notes and bonds that pay interest - and floating rate issues. It will focus on "trends in structural demand" and the potential costs and risks associated with different issuance strategies, when considering raising auction sizes.

The Treasury also said it will sell $58 billion in U.S. three-year notes, $42 billion in 10-year notes, and $25 billion in 30-year bonds next week. Those figures matched the auction sizes for the same securities announced at the November refunding.

"The refunding broadly met expectations. No changes to nominal coupon sizes or floating rate notes and really no change to forward guidance," said Zachary Griffiths, head of investment grade and macro strategy at CreditSights in Charlotte, North Carolina.

OVERFUNDED FOR 2026 FISCAL YEAR

The minutes also showed that dealers estimated that at those current issuance sizes, the Treasury is slightly overfunded for the 2026 fiscal year, as they reduced their aggregate privately-held marketable borrowing estimate by $258 billion for the 2026-2028 fiscal years.

Dealers broadly expect the next increase in nominal coupon auction sizes to come in late 2026 or early 2027. Banks and other market players had previously penciled in those increases for next year.

"The TBAC made a comment that it could be beneficial to begin increasing nominal coupon auction sizes earlier, at a more gradual pace, and perhaps that's causing a small market reaction," CreditSights' Griffiths said.

The yield curve steepened after the Treasury refunding announcement, with market participants pointing to the $1.1 trillion deficit shortfall cited in the TBAC minutes and expectations of an earlier-than-expected time frame for the increase in auction sizes for coupon issuance.

The spread between U.S. two-year and 10-year yields rose to 70.8 basis points (bps) after the refunding statement, from 69.3 bps late on Tuesday. It was last at 70.7 bps.

A steeper curve can signal concerns about rising fiscal deficits, prompting investors to avoid the long end of the curve.

The Treasury also said it expects to maintain the offering sizes of benchmark bills at or near current levels into mid-March. By late March, however, it anticipates modestly reducing short-dated bill auction sizes due to the April 15 income tax deadline.

The department noted that these reductions will likely lead to a cumulative $250 billion to $300 billion net decline in total bill supply by early May.

In terms of cash balance, the Treasury said it estimates the size of the Treasury General Account (TGA) could peak around $1.025 trillion by late April, before declining in May. It noted that the forecast carries significant uncertainty, given the unpredictable size of April tax receipts and broader macroeconomic, fiscal, and monetary conditions.