By Deborah Levine, MarketWatch
NEW YORK (MarketWatch) — The bond market can breathe a collective sigh of relief that it looks like the Treasury Department will be able to announce Wednesday how much in notes and bonds it will auction next week in its regular quarterly refunding of the federal debt.
Well, it’s usually “regular” and the refunding announcement goes like clockwork, with the government almost always selling the same amount of each security that bond traders expect.
But a lot of nervousness has built in the last week regarding the Treasury’s ability to conduct business as usual while waiting for lawmakers to raise the U.S. debt ceiling, which will enable the Treasury to borrow as needed to pay the government’s bills and fund programs that Congress already agreed to.
Treasury Secretary Timothy Geithner has said for weeks the department wouldn’t be able to do that past Tuesday. But a deal to raise the debt ceiling was finally approved by the Senate after the House did so late Monday, leaving it to President Barack Obama to sign the legislation into law as the final step.
“The passage of the bill would clear the way for a normal refunding,” said Lou Crandall, chief economist for Wrightson ICAP.
That’s important because one of the elements that keeps Treasury bonds seen as a safe haven for investors is its unmatched depth and liquidity, which is in part due to its regularly scheduled auctions of new debt. Bond investors like knowing that trading in this market is active enough that they can get in and out when needed.
In this case, it’s predicted that the government will say on Wednesday that next week it will sell $32 billion in 3-year notes 3_YEAR -10.16% , $24 billion in 10-year notes 10_YEAR -3.64% and $16 billion in 30-year bonds 30_YEAR -2.52% . Those would be the same amounts as they sold at the last quarterly refunding in May.
“The only wrinkle for the refunding was the debt limit,” said Anshul Pradhan, bond strategist at Barclays Capital, one of the 20 primary government security dealers required to bid at Treasury auctions. “If that’s not an issue, I don’t expect any changes to auction sizes over the next few months in the refunding announcement.”
Then there’s the question of what about auctions that are tentatively scheduled after the refunding, both of short-term bills and notes and bonds.
Crandall said he’ll be listening for any comment from the department about whether they are reviewing the sizes of their auctions or keeping them steady in coming quarters.
How much after the refunding
While the amounts of notes and bonds are unlikely to change in the near term, officials may say something about how quickly they’ll boost issuance of bills, which they usually have to do this time of year but have been holding back on recently because of the approaching debt ceiling.
Assuming the current debt deal gets signed into law, the Treasury should have plenty of borrowing authority for those auctions, said Nancy Vanden Houten, budget and bond analyst at Stone & McCarthy. After that, the Treasury would probably have to pay back the government trust funds they’ve borrowed from, and in fairly short order, she said.
Accordingly, lawmakers would need to vote on the next round of debt authority by about the middle of September.
In the interim, the government is slated to sell a lot of short-term bills, and then its monthly notes mid-month.
On Monday, the Treasury Department, in its regular announcement of its quarterly borrowing estimates, said it expects to issue $331 billion in debt in the July-through-September quarter — less than it previously estimated in May due to lower outlays and an adjustment in its cash balance.
While that’s a little lower than some analysts expected, it opens the door for questions about where the Treasury may choose to shrink auction amounts and how that would affect the average maturity of the government’s debt — something they’ve been adjusting.
“We would like to know by how much the Treasury wants to extend its average maturity and over what time frame,” Pradhan said. “This would give us more clarity about auction sizes going forward.”
Deborah Levine is a MarketWatch reporter, based in New York.
