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Economic Report: U.S. Treasury to auction $103 billion next week in refunding, down $7 billion from last quarter

The refunding: As part of its regular quarterly refunding, the U.S. Treasury announced Wednesday it would sell $103 billion in notes and bonds next week. That’s down slightly from $110 billion last quarter.

The department will auction $45 billion in three-year Treasury notes
TMUBMUSD03Y,
2.984%

on May 10, $36 billion in 10-year notes
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2.977%

on May 11 and $22 billion of 30-year bonds
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3.006%

on May 12.

The balance of Treasury’s financing requirements over the quarter will be met with weekly bill auctions, cash management bills, and monthly note, bond, Treasury Inflation-Protected Securities (TIPS), and 2-year Floating Rate Note auctions.

Reducing auction sizes: Treasury said it will cut auction sizes by $69 billion over the quarter. The department will gradually reduce the size of 2-year, 3-year and 5-year Treasury note auctions by a total of $3 billion by July. The 7-year Treasury note will be cut by $6 billion over the next three months. New and reopened 10-year Treasury notes will be trimmed by $1 billion. The new and reopened 20-year bond auction will be cut by $2 billion.

Big picture: With the federal budget deficit expected to narrow sharply this fiscal year – from close to $3 trillion to about $1 trillion, Treasury has been reducing auction sizes. Steve Stanley, chief economist at Amherst Pierpont, thinks this is the last of the cuts. In the coming quarter, Treasury debt managers will have to increase auction sizes due to the Fed’s “quantitative tightening” program that is expected to be announced later Wednesday. “The Fed is going to embark on massive redemptions of its Treasury holdings. This is going to quickly produce a large funding gap for Treasury debt managers,” he said, in a note to clients. When the Fed allows maturing securities to roll off its balance sheet, Treasury has to increase its borrowing.

Benchmark 4-month bill: Treasury said it intends to change the 4-month cash management bill into a “benchmark bill” with regular weekly issuance going forward.

TIPS Financing: The government will increase the June 5-year TIPS reopening auction size by $1 billion to $18 billion and the July 10-year TIPS new issue size by $1 billion to $17 billion.

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