Wall Street Dealers Shred Treasury Auction Size Forecasts After Bessent Remarks | Stock Market News

(Bloomberg) — Wall Street dealers — until recently expecting US government debt auction sizes to resume growing next year — are going back to the drawing board after comments by Treasury Secretary Scott Bessent this week.

Interest-rate strategists at Bank of America Corp. scrapped their earlier forecast for note and bond auction size increases beginning in February, predicting levels will remain unchanged into 2027. Any increase in the borrowing need — which is expected based on federal deficit trends — will be met with more issuance of bills, which mature within a year, they said in a note Wednesday.

Those changes follow Bessent indicating in a Bloomberg Television interview Monday that it wouldn’t make sense for the government to ramp up sales of longer-term securities because yields have risen. Bank of America’s previous forecast was based on the Treasury Department’s quarterly borrowing statement on April 30. 

Related story: Bessent Says Wouldn’t Lift Long-Term Bond Sales at Today’s Rates

Bessent and other members President Donald Trump’s administration, which took office in January, had excoriated their predecessors for selling too many bills and not enough notes and bonds. Selling bills can be cheaper in the short term because under normal circumstances they carry lower interest rates. But they expose the government to the risk that when they mature, the rates will be higher — termed rollover risk.

So it came as a surprise to many on Wall Street when they retained — for a second time — the previous administration’s guidance that auction size changes were likely to be maintained “for at least the next several quarters.” 

Bessent’s comments Monday effectively lengthen the runway for maintaining the sizes of the Treasury’s seven main borrowing vehicles — notes and bonds maturing in two, three, five, seven, 10, 20 and 30 years. Their sizes have been stable since the first half of 2024.

The next quarterly announcement is set for July 30, and a related questionnaire for dealers is slated to go out on July 11. The department may use the survey, the Bank of America strategists said, “to focus on capacity for the market to absorb additional bill supply,” among other factors to guide decision-making about auction sizes, they wrote.

Bills make up about 21% of Treasury debt outstanding. The administration may be willing to tolerate a share of as much as 25%, the approximate peak in 2020, Bank of America said, concurring with a Citigroup Global Markets forecast last month.

Even before Bessent’s latest remarks, however, a couple of major dealers predicted no changes before 2027 or 2028, and even the potential for some auction sizes to be reduced.

At BNP Paribas, head of US rates strategy Guneet Dhingra after the April 30 borrowing announcement said the Treasury Department could “forgo increasing coupons for up to three years, and “could even considering lowering coupon supply at the next refunding” on July 30.

“You could very conceivably see a strategy where the Treasury is issuing all their incremental funding needs via T-bills and keeping coupon supply unchanged,” Dhingra said in an interview last month. “That I think would surprise investors, and especially the ones who are concerned about supply and demand.”

Relying more on bills for financing carries less rollover risk than in the past, Dhingra said, because the US government carries a cash balance that averaged about $850 billion last year, about double what it did before 2020. That amount would otherwise have to be borrowed.

Interest-rate strategists at TD Securities also hold the view that Treasury “could hint at long-end auction size decreases as soon as the August refunding,” they said in a May 29 report.

That’s related in part to the administration’s reckoning with robust demand for bills, not least from US money-market funds, whose combined assets of about $7 trillion exceeds the $6 trillion of bills outstanding.

“That discussion of terming out the debt didn’t last very long,” Gennadiy Goldberg, TD’s head of US interest-rate strategy, said last week. “There’s been a realization that the marginal demand was at the front end,” and not for long-maturity debt.  

At the same time, federal budget deficit forecasts — though broadly in agreement that the long-term trend is dire — are on shaky ground in the short term because of the seismic policy changes the Trump administration is pursuing, beginning with tariffs that are pulling in revenue. 

Tariffs are “a new source of income and not going to a predetermined program,” Goldberg said. “Next year they will offset deficit spending,” but $150 billion to $160 billion is anticipated for this year, and “that will help push back the timeline of auction size increases ever so slightly.”

–With assistance from Alexandra Harris and Carter Johnson.

More stories like this are available on bloomberg.com