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Expected cuts to Treasury auctions may be 'calm before the storm'

The move, which is well anticipated on Wall Street, will likely total an $800 billion cut in nominal auction sizes in the 2022 fiscal year compared with the 2021 fiscal year, according to estimates from NatWest

October 30, 2021 / 09:14 AM IST
The US Federal Reserve building

The US Federal Reserve building

The United States Treasury Department is expected to reduce the size of its upcoming auctions when it announces its funding plan for the coming quarter on November 1, the first step in lowering debt supply as the federal government moves past its emergency-level response to the coronavirus pandemic.

The move, which is well anticipated on Wall Street, will likely total an $800 billion cut in nominal auction sizes in the 2022 fiscal year compared with the 2021 fiscal year, according to estimates from NatWest. The majority of those cuts will come in securities with a 7-year duration or less, with a $2 billion per month cut in Treasury bonds with durations of 2, 3, and 5 years, and $3 billion per month cuts in 7, 10, and 20-year Treasuries, the bank estimates.

"After ramping up coupon issuance to fund pandemic spending, it is now time for Treasury to start reducing issuance sizes commensurate with more normal deficits," said Meghan Swiber, a rates strategist at Bank of America Global Research.

While the Treasury's expected plans to lower bond supply will increase demand for shorter-duration bonds and steepen the yield curve, the reduction in debt issuance may be short-lived given the likelihood of that Congress will pass a Democrat-led $1 trillion infrastructure bill and a $1.75 trillion bill to address climate measures and social initiatives, said Scott Kimball, co-head of U.S. fixed income at BMO Asset Management. L1N2RO0ZK