The US Treasury said on Wednesday it will keep coupon auctions steady in the third quarter and has begun to consider how it will increase debt issuance later in the year to make up for a future decline in Federal Reserve bond purchases. “Treasury will likely respond to additional borrowing needs … by increasing both Treasury bill and Treasury nominal coupon auction sizes,” Monique Rollins, Treasury’s acting assistant secretary for financial markets, said in a statement. She added that when the timing of the Fed’s plans becomes available, Treasury will offer further guidance. The US Federal Reserve has signalled it may begin as early as September to cut its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities, which it bought in the wake of the 2007-2009 financial crisis and recession. In its quarterly refunding announcement, Treasury also said it would auction $62 billion in coupon debt next week and gave no further immediate information on its consideration of introducing ultra-long bonds.
In May, Treasury said it was studying the possibility of issuing ultra-long bonds although its advisory committee had questioned investor enthusiasm for such a change. An ultra-long bond would fit in with Treasury’s objective to fund the government at the least cost over time. On Monday, Treasury said it expects to raise $96 billion through credit markets during the July-September quarter, down $2 billion from its initial estimate. It also said it expects to issue $501 billion in net marketable debt in the fourth quarter, a marked jump that in part reflects Treasury’s current inability to ramp up borrowing in the third quarter as it struggles to raise the nation’s statutory borrowing limit, currently at $19.9 trillion.
Congress has yet to reach a deal and US Treasury Secretary Steven Mnuchin has warned the government will fully exhaust its borrowing capacity in October. “A substantial portion of this marketable borrowing reflects Treasury’s plan to restore the cash balance to a prudent level,” Treasury said.