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30Y Yields Slide After Treasury Refunding Does Not Mention Ultra-Longs; Can Fund Through September

Contrary to expectations that the Treasuey may address the growing financing need (with implications for curve) by announcing a higher than expected amount of near-term Treasury issuance, the US Treasury announced a $62.0 billion refunding package this morning, in line with expectations and unchanged from recent Refundings. The Refunding auctions will consist of a $24.0 billion 3-year note, a $23.0 billion 10-year note and a $15.0 billion 30-year bond.

The Refunding auctions, which will be held next Tuesday, Wednesday and Thursday, will raise a combined $14.7 billion after accounting for maturing issues excluding Fed holdings, based on SMRA calculations. The 3-year note auction will pay down $3.0 billion when the auctions settle, the 10-year note auction will raise $7.5 billion, and the 30-year bond auction will raise $10.2 billion.

The Fed holds approximately $12.5 billion of the maturing 10-year note and $6.1 billion of the maturing 30-year bond. The combined $18.7 billion in Fed holdings that will mature on the 15th will be rolled over into the Three Refunding issues in amounts proportional to the auction sizes. As a result, the Fed will roll over approximately $7.2 billion in to the 2-year note auction, $6.920 billion into the 10-year note auction, and $4.513 billion into the 30-year bond auction. Those roll overs will all be treated as add-ons, and as such should not directly influence the auctions.

In addition, Treasury will pay out approximately $23.8 billion in coupon interest payments to the public as the auctions settle on Tuesday, along with $16.0 billion in coupon interest payments to the Federal Reserve. Treasury said again this morning that they will not change the size of nominal coupon auctions during the quarter ahead. Separately, regarding the debt ceiling, they expect to "be able to fund the government through the end of September."

While the Treasury did not offer any updates on any future plans for issues longer than 30-year, it did note the need for adjustments if and when the Fed begins to normalize their balance sheet, stating they would "likely respond" by "increasing both Treasury bill and Treasury nominal coupon auction sizes, beginning with bills and then coupons."

Addressing future funding needs, in its minutes the TBAC said "the Committee was generally of the view that the borrowing needs would likely be best addressed by increasing issuance in bills and a broader set of coupons, but concluded that it was premature to make specific recommendations regarding sequencing or tenors at this time.  Instead, the Committee generally agreed that Treasury consider making a decision about a strategy as early as the November refunding, but no later than the first calendar quarter of 2018."

Following the report, 30Y yields slid to session lows of 2.85%, prompted by the lack of discussion of ultra-long dated debt.