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US Treasury keeps notes, bonds auction sizes steady, increases debt buybacks
US Treasury keeps notes, bonds auction sizes steady, increases debt buybacks

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timea day ago

  • Business
  • Yahoo

US Treasury keeps notes, bonds auction sizes steady, increases debt buybacks

By Gertrude Chavez-Dreyfuss NEW YORK (Reuters) -The U.S. Treasury Department said on Wednesday it does not anticipate increasing auction sizes for notes and bonds for at least the next several quarters, in line with market expectations, as it announced a $125 billion refunding from August to October 2025. It will, however, continue to make incremental increases to the size of Treasury Inflation-Protected Securities (TIPS) and T-bill auctions. "We use T-bills as a shock absorber for unexpected, seasonal or short term variations in borrowing needs as part of our regular and predictable issuance plan," a senior Treasury official said in a call with reporters on Wednesday. "That's because we believe ... changes in borrowing needs and addressing them in the people market is the most effective way to borrow at the least cost over time because of the ability of that market to absorb those kind of short-term changes. We think that the level of bill issuance offered today is very consistent with those plans and has helped us in light of the changes." In a statement, department will further sell $58 billion in U.S. three-year notes, $42 billion in 10-year notes, and $25 billion in 30-year bonds next week. These were the same auction sizes for the same securities announced at the February refunding. The Treasury also announced it will double the frequency of long-end nominal buybacks and increase the size of cash management buybacks, all aimed at improving liquidity in the market. The changes to the buybacks will take effect on August 13. "The Treasury will be focusing more on bill supply and they are trying to help market liquidity by increasing the sizes and frequency of buybacks, especially in the long end of the curve," said Gennadiy Goldberg, head of U.S. rates strategy, at TD Securities in New York. "So net net, this should be slightly positive for the long end." Long-dated Treasuries briefly rallied after the refunding announcement, pushing their yields lower. But their yields were last higher on the day as the initial impact from the refunding was muddied by the strong U.S. gross domestic product number. U.S. 10-year yields were last up 4.4 basis points at 4.372%. The Treasury announced that it's increasing the frequency of liquidity support buybacks in both the 10- to 20-year and 20- to 30-year nominal buckets to four times per quarter from two currently. But it will keep the current $2 billion maximum purchase per operation in both sectors. With respect to the other nominal coupon pairs, the department will continue to conduct one liquidity support operation per quarter for up to $4 billion. All told, the changes will lift total size of liquidity support buybacks from a maximum par amount of $30 billion per quarter to $38 billion. CASH MANAGEMENT BUYBACKS The Treasury is also increasing the size of cash management buybacks from a maximum $120 billion per year to $150 billion. For this quarter, however, it does not expect conducting cash management buybacks around the September tax date due to the ongoing rebuilding of the Treasury's cash balance. Cash management buybacks will resume in December, the Treasury said. Overall, the Treasury's financing plan will refund about $89.8 billion of privately-held Treasury notes and bonds maturing on August 15 and raise new cash of $35.2 billion from private investors. The Treasury also stressed the focus on T-bill issuance this quarter. It expects further marginal increases in T-bill auction sizes in coming days and then maintaining sizes at or near those levels through the end of September. It added that further increases in T-bill auction sizes are anticipated in October. "This guidance (on T-bill issuance) will continue to be the focal point of future refunding announcements," wrote Tom Simons, chief economist at Jefferies in a research note. "(Treasury) Secretary (Scott) Bessent has made it clear that he is carefully considering the best strategy and timing for terming out the debt versus continuing to lean on the front-end. At some point, perhaps after a few Fed (Federal Reserve) rate cuts, issuance of more coupons will be more attractive." Median forecasts from primary dealers estimated that Treasury could increase bill supply by $260 billion over a month and by $600 billion over a quarter without causing significant price deviations in bills relative to fair value, according to minutes of the meeting on Tuesday of the Treasury Borrowing Advisory Committee released on Wednesday. With respect to TIPS, Treasury plans to maintain the 30-year TIPS reopening auction size at $8 billion for August, increase the 10-year TIPS reopening auction size to $19 billion in September, and increase the October 5-year TIPS new issue auction size to $26 billion. Sign in to access your portfolio

US bond investors weigh 'convexity' risk in recent Treasury yield decline
US bond investors weigh 'convexity' risk in recent Treasury yield decline

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time25-03-2025

  • Business
  • Yahoo

US bond investors weigh 'convexity' risk in recent Treasury yield decline

By Gertrude Chavez-Dreyfuss NEW YORK (Reuters) -The recent drop in U.S. yields has raised speculation that a wave of buying of Treasury securities and derivative products called interest rate swaps by mortgage portfolio managers and insurance companies was partly responsible for their decline. These purchases are for "convexity" buying that helps offset the effects of mortgage refinancing to take advantage of lower interest rates. They could amplify the decline in Treasury yields that has taken place in recent weeks due to concerns about economic growth. Convexity is a term describing how small changes in interest rates can have a disproportionate impact on an asset manager's portfolio or an insurer's balance sheet. Convexity buying looks to have started early this month, as yields slid to the lowest since late October, from 15-month highs in February, analysts said. The benchmark U.S. 10-year yield, which influences the cost of borrowings on homes, cars, and businesses, has not moved much since bottoming around 4.10% on March 4, after a 56-basis point decline since February 6. But the yield fell 18 bps from March 13 to 4.17% on March 20. "There's always convexity hedging going on," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York, citing the amount of uncertainty in markets from mid-January to the end of February and early March. "It varies in intensity. But it's a large enough move for folks to position their portfolios." When rates fall, mortgage players including originators, servicers, and investors in mortgage-backed securities (MBS) - insurance companies and real estate investment trusts (REITs) -typically shift hedges on mortgage holdings to balance their portfolios. Mortgages and MBS allow borrowers to refinance or prepay their loans when rates fall. These prepayments shorten the average life of the mortgage bond, reducing its yield, with the price increasing less than expected when rates fall. This is called "negative convexity" and leaves investors with lower portfolio duration than their benchmark. While 64% of outstanding mortgages are locked into interest rates below 4%, about 16% have rates above 6%, which could be refinanced quickly when rates fall, Goldman Sachs, in a research note, said. To keep their portfolio duration in line with their benchmarks, MBS investors will buy either Treasuries, or Treasury futures. They can also buy an interest rate swap, wherein they would receive a fixed rate while paying a floating one, a trade that protects against falling rates. Investors also hedge against negative MBS convexity by buying so-called "receivers" in the swaptions market, in which the buyer pays a premium for the right to receive a fixed rate on a swap. Analysts said the swaptions market has been skewed toward more receivers, as participants brace for further rate declines. "There has been a lot of convexity receiving. Investors also want to buy duration because they are concerned lower rates will lead to an imbalance in their portfolios," said Guneet Dhingra, head of U.S. rates strategy at BNP Paribas. For insurance companies, lower rates could erode profitability for both policyholders and shareholders. To be sure, active MBS hedgers have dwindled, falling from a peak of 27% of all investors who hold mortgages in their portfolios in 2002 to 6% currently, so the impact of convexity moves is likely limited, Goldman wrote in a research note. SIGNS OF CONVEXITY HEDGING Convexity hedging was evident recently in the tightening spread between a 10-year interest rate swap and the 10-year Treasury yield. Tighter swap spreads meant that the differential between the two assets has become more negative, with swap rates falling because of increased demand for fixed-rate payments during bouts of convexity buying. In fixed-income debt, a rise in price leads to a fall in yield. U.S. 10-year swap spreads fell to minus 44 bps on Monday from minus 38.30 bps on February 14. In addition, the short-term implied volatility on longer-dated swaptions such as those on 10-year and 30-year swap rates, has increased. Implied vols of three-month options on 10-year swap rates had risen to a four-month high on March 10 of 27.71 bps, before stabilizing to 25 bps late Monday. Amrut Nashikkar, managing director and head of derivatives strategy, at Barclays in New York, said volatility in short-dated options such as those with one-year maturities has been elevated given the level of policy uncertainty on trade and tariffs under the Trump administration. But "expectations of underlying convexity needs caused implied vols to become elevated in longer tenors," he said. Sign in to access your portfolio

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