Treasury shifts to longer-term debt offerings, including $20 billion in new 20-year bonds, to finance ballooning deficit

U.S. Treasury will sell 20-year bonds for the first time on May 20

The US Treasury Department building is seen in Washington, DC.


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What’s new: The U.S. Treasury Department on Wednesday laid out a plan to pay for the ballooning fiscal deficit that ramps up the sale of longer-duration securities. The department said it would increase auction sizes across the curve by $154 billion but shift financing to longer-dated securities over the coming quarters.

The refunding: As part of its regular quarterly refunding, Treasury announced it would sell $96 billion in notes and bonds next week. This is up from $84 billion in the last quarter.

The department will auction $42 billion in 3-year Treasury notes
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on May 11 and $32 billion in 10-year notes
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on May 12. The government will also sell $22 billion in 30-year bonds
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on May 13.

The changes in auction sizes: In the May-July quarter, Treasury said it intends to increase auction sizes for 2-year, 3-year and 5-year note auctions by $2 billion per month. It will increase the auction size of the 7-year note
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by $3 billion per month over the next 3 months. The size of the 7-year note will increase by $9 billion by the end of July. It will increase both new and reopened 10-year note auctions by $5 billion and the 30-year new and reopened 30-year bond auctions by $3 billion.

Treasury also will sell $20 billion of 20-year bonds in the initial auction on May 20. It will reopen the 20-year bond in both June and July in amounts of $17 billion each. The 2-year floating-rate note will be increased to $24 billion by July.

The department also set weekly issuance of cash management bills.

New issuance: Treasury said it continues to explore a floating rate note indexed to the Secured Overnight Financing Rate or SOFR.

What are they saying? “The main story here is they have chosen to lean hardest on the long end of the curve. I recommended that Treasury start small with 20s, at least for the first quarterly cycle…instead Treasury is jumping in with both feet, hopeful that demand will be robust for 20s and that there will not be much cannibalization of demand for 10s and 30s,” said Steve Stanley, chief economist at Amherst Pierpont.

Big picture: The cost of protecting the economy from the coronavirus pandemic is steep and will bring the federal debt to levels not seen since World War II.

The Fed is easing the burden somewhat, having bought roughly $1.3 trillion of Treasurys since mid-March. The Congressional Budget Office has forecast the federal budget deficit is projected to be $3.7 trillion for fiscal year 2020.

Market reaction: Longer-dated bond yields rose sharply, surprised by the size of the 20-year bond, which was much larger than around $14 billion estimated.

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