By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) - The U.S. Treasury Department said on Wednesday it plans to continue gradually raising coupon auction sizes through April, but beyond that it does not expect further increases for at least the next several quarters, given the current projected borrowing needs.
In a statement, the Treasury announced total quarterly refunding of $121 billion to refund approximately $105.1 billion of privately held notes maturing on Feb. 15.
The auction size increases were in line with market expectations, analysts said.
The refunding intends to raise new cash of $15.9 billion from private investors. This includes selling next week $54 billion in U.S. three-year notes, $42 billion in 10-year notes, and $25 billion in 30-year bonds.
U.S. Treasury prices rose, pushing yields lower, after the announcement, as investors cheered the fact that there will be no further increases in the next few quarters after April.
U.S. 10-year yields were last down 8.6 basis points at 3.97%, while the two-year yield slid 13 bps to 4.231%.
"It's good that there's not going to be more auction size increases, so long as they follow through with it," said Tom Simons, U.S. economist at Jefferies in New York.
"But the monthly supply of nominal coupon auctions is now 40% bigger than in July 2023, when they started increasing these auctions. It's $93 billion per month more and so is that good? No. We're still in a very sketchy position in the U.S.," he added.
The increases in auction sizes announced on Wednesday "will leave Treasury well positioned to address potential changes to the outlook and any potential changes to the duration" of future System Open Market Account (SOMA) redemptions," Josh Frost, the Treasury's assistant secretary for financial markets, said at a press briefing after the refunding announcement.
SOMA is managed by the Federal Reserve and contains assets acquired through operations in the open market.
On Monday, the Treasury announced it expects to borrow $760 billion in the first quarter, $55 billion below the October estimate primarily due to forecasts for increased net fiscal flows and higher cash on hand. In the second quarter, the Treasury expects to borrow $202 billion.
On Wednesday, the Treasury said it plans to increase the auction sizes of the two- and five-year notes by $3 billion per month. Meanwhile, the auction size for the three-year notes will increase by $2 billion per month, and the seven-year by $1 billion per month.
As a result, the auction sizes of the two-, three-, five-, and seven-year notes will increase by $9 billion, $6 billion, $9 billion, and $3 billion, respectively, by end-April, the Treasury said.
It also intends to raise both the new issue and reopening auction sizes for the benchmark 10-year note by $2 billion and the 30-year bond by $1 billion.
For the 20-year bond, the Treasury said it will maintain the new issue and reopening auction sizes.
The Treasury will also increase the February and March reopening auction sizes for two-year floating-rate notes by $2 billion and the April new issue size by $2 billion.
The auction sizes for Treasury Inflation-Protected Securities (TIPS) will have incremental increases "in order to maintain a stable share of TIPS as a percentage of total marketable debt outstanding."
From February to April, the Treasury will maintain the February 30-year TIPS new issue auction size at $9 billion, increase the March 10-year TIPS reopening auction size by $1 billion to $16 billion, and lift the April five-year TIPS new issue auction by $1 billion to $23 billion.
As for Treasury bills, the department said it expects to keep bill auction sizes at current levels into late March, which will likely result in a $300-350 billion net increase to privately held supply over the next two months.
By late March or early April, Treasury anticipates modestly reducing short-dated bill auction sizes going into the tax filing season.
The Treasury also gave an update on its planned buyback program later this year. It intends to announce the date of the first regular buyback operation at the May refunding. In the meantime, it will conduct small-value buyback operations in April with a limited securities to test processes and infrastructure.