US Treasury Preps for Massive Bond Auction

With a sale that includes a massive $70 billion offering of 5-year notes, the government hopes to close the widening deficit.

Photo of U.S. Treasury Building
Photo by Meanie Hyaena via CC BY 4.0

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The Fed needs to offload some merch. 

On Wednesday, the US Treasury announced it would increase the size of upcoming bond auctions to unusually high levels, including a $70 billion five-year bond sale in April that will mark the biggest sale ever for debt with a maturity of two years or more. The news comes just as the Federal Reserve told the world to hold its horses and bronze bull memes – interest-rate cuts may not be as fast and furious as some may think.

Going Once, Going Twice

The federal government has increased its borrowing through the past few quarters, adding to the ever-larger disparity between spending and tax revenue. So far in fiscal 2024, the government has spent about $510 billion more than it has collected, and, at the end of 2023, the overall federal deficit sat at $1.7 trillion. To offset that gap, the US Treasury has stepped up its quarterly bond sales, with this upcoming quarter marking the third such boost in a row. The auction sizes for two-year and five-year notes are increasing by $3 billion each per month, the same pace of increase seen last quarter — though now bringing both categories to record highs. The Treasury did note that it expects this to be the last increase in auction sizes this year, likely soothing concerns of oversupply.

Complicating matters slightly has been the Fed, whose interest rate hikes ballooned debt interest costs. And while many an optimistic trader has started pricing in rate cuts sooner rather than later, Jerome Powell & Co. spent Wednesday bluntly telling everyone it’s more a matter of later than sooner:

  • Wednesday’s unanimous decision marks the fourth straight Fed meeting in which the rate-setters opted to keep the benchmark federal funds target between 5.25% and 5.5%, with the central bank urging that it needs “more confidence” inflation is falling to its 2% target before rate slashing can begin.
  • While most still see up to 75 basis points worth of cuts throughout this year, it now seems unlikely those cuts will begin at the next Fed meeting in March. A statement from the Fed Wednesday did, however, confirm that the group is much more likely to cut rates next than raise them again.

America Decides: The confluence of news helped treasuries continue their rally on the market, though some see a considerable shakeup to the government debt market on the horizon — not from the Fed rate, but the upcoming election. “Supply dynamics are set to increasingly appear on investors’ radar in the lead up to the US election, not least because of the deficit increase on the back of [presidential hopeful Donald] Trump’s plans to take the corporate tax rate from 21% to 15%,” Mike Riddell, a bond fund portfolio manager at Allianz Global Investors, told the Financial Times.