Treasury Releases New Details on 20-Year Bond Plans -- 2nd Update

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02/05/2020 | 08:20 pm

By Kate Davidson

WASHINGTON -- The Treasury Department on Wednesday provided new details about its plans to begin regular auctions of 20-year bonds in the first half of 2020, expanding its suite of products to fund projected growing federal budget deficits.

The Treasury said it plans to issue new 20-year bonds each quarter -- in February, May, August and November -- and will hold auctions in the third week of the month, the same week as Treasury inflation-protected securities, or TIPS. Auctions will settle at the end of the month or the first business day thereafter, the Treasury said, "in order to spread the auction supply of duration more evenly across the month."

The Treasury stopped short of saying when the first bond will be issued or the potential size. More details about the timing of the first auction and size will be released in May, the agency said. A Treasury advisory committee said it supported an initial auction size of about $10 billion to $13 billion, starting in May, according to minutes of its meeting this week.

The initial sizing is smaller than what some investors and research analysts were expecting -- with estimates as high as $35 billion -- but analysts say the Treasury doesn't have the financing needs this year to justify a larger size.

In an unorthodox announcement that took markets by surprise, the agency said last month it would revive the 20-year bond, which hasn't been issued regularly since 1986, as it sought ways to attract additional investment.

Investors welcome the move, saying longer-dated financing is useful for corporates, pension funds and banks in terms of financing markets.

"We are at a historic point in time in terms of demand for yield, low interest rates -- and the yield curve is flat. To issue longer-dated financing makes a lot of sense," said Rick Rieder, chief investment officer of global fixed-income at BlackRock Inc. "The 20-year part of the yield curve fits a large number of players in the market and the yield curve hasn't been filled out yet."

Treasury officials had also been considering selling bonds with maturities of 50 and 100 years, though some analysts questioned demand for those securities and bond dealers showed little interest in the idea.

"Regarding the very long maturity bonds, I think all you can say is that the Treasury thought it would be more expensive financing than they could get from issuing at more traditional maturities," said William English, professor of finance at Yale University and former head of the Fed's monetary-affairs division. "The issue will likely return -- the latest Congressional Budget Office projections have deficits growing a fair amount over coming years."

The CBO said last week it expects the deficit to top $1 trillion in the fiscal year that ends Sept. 30, and reach or exceed that threshold every year for the foreseeable future. As a share of gross domestic product, the deficit will be at least 4.3% every year through 2030, the longest stretch of deficits above 4% over the past century, according to CBO, a nonpartisan arm of Congress.

"I still think the Treasury can and will issue a 50-year bond," said Mr. Rieder.

The government spent $1.02 trillion more in 2019 than it took in, the Treasury said last month, the highest calendar-year deficit in seven years.

Officials also said Wednesday they are still considering the possibility of issuing a new floating-rate note linked to the secured overnight financing rate, or SOFR, which is set to replace Libor by the end of 2021. They said they plan to issue a formal request for information on the idea in the first half of this year.

Analysts anticipate the new floating-rate note would replace the 2-year T-bill floating note. While corporations and financial institutions have issued debt linked to SOFR, traders and investors are waiting for buy-in from the Treasury to further legitimize the nascent benchmark.

The Treasury said it would maintain nominal coupon auction sizes over the coming quarter, bucking some investor expectations and sparking concerns that Federal Reserve purchases could lead to scarcity in the T-bill market.

Traders say a decline in auction sizes could leave investors in a scramble and the Treasury Borrowing Advisory Committee has warned the purchases could lead to shortages if the Treasury doesn't change its coupon auction sizes.

"The bill market held by private investors will likely fall by approximately $400 billion to the $1.8 trillion level, shrinking to its lowest level since the fall of 2017 despite the fact that the money-market complex has grown over that time period," said Jay Barry, head of USD government bond strategy at JPMorgan. "As a result, the market could be somewhat disrupted in the second and third quarters of this year."

A senior Treasury official said liquidity remains robust in the Treasury bill market, despite months of bill purchases by the Federal Reserve to quell volatility in overnight funding markets.

The Fed began buying short-term Treasury debt in September to prevent money-market volatility from pushing its benchmark federal-funds rate out of its range. The Fed said last week it still plans to continue the purchases into the second quarter of 2020, and Fed Chairman Jerome Powell said he expects the purchases to be gradually reduced, starting around the middle of this year.

Treasury officials said they would continue to monitor the Fed's plans and the potential effect on Treasury bill supply.

Mr. Rieder said he doesn't think the Treasury needs to reduce coupon issuance today.

"Some people are worried, but the Fed is going to reduce the amount of T-bills they are buying," he said.

The Treasury also said Wednesday that the Financial Industry Regulatory Authority, or Finra, would begin releasing a report on weekly aggregated Treasury securities transactions starting in March. Finra has been collecting data on the Treasury market through its Trade Reporting and Compliance Engine since July 2017, though the data hasn't been made public.

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