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U.S. Debt Sales to Hit Record With Deficit Headed to $4 Trillion

Saleha Mohsin and Liz Capo McCormick

(Bloomberg) -- The U.S. Treasury is boosting the amount of debt it plans to issue in the coming quarterly refunding auctions to a record $96 billion to provide government funding as the economy heads into a recession caused by the coronavirus.

The department said Wednesday it anticipates auctioning the first re-booted 20-year bond on May 20, with an expected initial offering size of $20 billion -- larger than most analysts projected. It also unveiled plans to boost overall issuance with a focus on increases to longer-term debt.

Treasury Secretary Steven Mnuchin’s plans for unprecedented debt issuance come as the Trump administration braces for what it sees as a 40% contraction in economic growth in the second quarter. The federal deficit is set to surpass estimates of $4 trillion for this year as lawmakers discuss additional economic stimulus.

“It’s pretty amazing that they are doing this much in the long end,” said Tom di Galoma, managing director of government trading and strategy at Seaport Global. “Treasury is trying to take advantage of the very low long-term rates.”

Investors responded by selling Treasuries, pushing longer-maturity yields higher in particular. The 10-year rate, a benchmark for global borrowing, climbed to 0.74%. While that’s the highest since mid-April, it’s still less than half a percentage point above the record low set in the market turmoil of March. German government yields rose as well.

Growing Needs

The Treasury said its “borrowing needs have increased substantially as a result of the federal government’s response to the Covid-19 outbreak.” It said it has raised an “unprecedented” $1.46 trillion on net since the end of March.

While dealers predicted that the government would tilt its funding toward notes and bonds after a surge in bill issuance since March, the degree to which Treasury leaned on debt with maturities of seven years or greater was a surprise. The average maturity of the Treasury’s debt has held fairly steady in the past year, but officials say it’s started to drop.

“The recent increase in bill issuance has decreased the weighted average maturity, while the increase in coupon sizes should counteract that somewhat,” Brian Smith, the Treasury’s deputy assistant secretary for federal finance, said in a phone briefing with the press.

The total combined sales of $96 billion for next week’s refunding -- the 3-, 10-, and 30-year auctions -- compares with $84 billion last quarter, a level that had held for the past five quarters.

Across Maturities

The Treasury also laid out increases to all of its nominal maturities over the quarter, leaning more heavily on longer-dated securites. It also plans to boost sales of floating-rate notes, but will leave inflation-linked debt -- known as TIPS -- unchanged.

“TIPS issuance sizes were increased throughout 2019, and we are still monitoring the results of those increases,” Smith said. “So in essence, the increase already happened and we didn’t feel a further increase was appropriate at this time.”

The size of the deficit is seen quadrupling as lawmakers seek to prevent a deeper downturn because of the Covid-19 outbreak. Mnuchin has led unprecedented fiscal spending -- from deferred tax receipts to cash for families -- to combat a virus-induced economic shutdown that has put more than 30 million Americans out of work.

Congress is gearing up to work on another spending measure that could be as large as $1 trillion.

The backdrop of the swelling deficit and the uncertainty of its path has led Treasury to increase the amount of cash it keeps on hand as a buffer. Its cash balance was about $1.10 trillion as of May 1 after reaching a record $1.18 trillion on April 30.

“Over the next quarter, Treasury’s cash balance will likely remain elevated as Treasury seeks to maintain prudent liquidity in light of the size and relative uncertainty of Covid-19 related outflows,” the department said.

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(Adds comment from Treasury official Brian Smith)

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