The Treasury Department said Wednesday it plans to make smaller reductions to the size of its nominal coupon auctions between May and July, after implementing larger cuts in recent months as the government’s borrowing needs declined.
Treasury began reducing the size of its nominal coupon and two-year floating-rate note auction sizes late last year, citing excess borrowing capacity. The decision announced Wednesday to cut coupon auction sizes by smaller increments comes as the Federal Reserve concludes its policy meeting later in the day and is expected to formally announce plans to begin shrinking the central bank’s $9 trillion asset portfolio, including substantial holdings of Treasury securities.
The Fed’s plan to reduce the size of its balance sheet is part of a broader strategy at the central bank to more urgently combat elevated inflation. Fed officials have discussed allowing up to $60 billion in Treasurys to mature each month as part of the reduction. Treasury, in turn, will have additional borrowing needs as it seeks to replenish its cash balances due to the Fed’s redemptions.
Despite the potential for Fed redemptions, lower borrowing needs driven by strong tax receipts allowed for the additional decreases in coupon auction sizes announced Wednesday, according to a Treasury official. Treasury said its issuance plans leave it well positioned to finance borrowing needs that may arise from Fed redemptions and that additional cuts may be necessary in future quarters.
Stephen Stanley, chief economist at Amherst Pierpont, said in a note to clients that he expects no further issuance cuts, given the Fed’s anticipated balance sheet reduction.
“Tax receipts have been extraordinary over the past few quarters, so I do not rule out Treasury’s scenario, but I suspect that the impact of Fed redemptions will outweigh any fiscal improvement that we see going forward,” he said.
Mr. Stanley said auction sizes could potentially increase in early 2023.
Treasury announced the cuts as part of its quarterly refunding process and said the changes will result in a $69 billion reduction of issuance to private investors between May and July compared with February through April. During the past two quarterly refunding processes, Treasury announced cuts it said would result in reductions of issuance to private investors of $111 billion and $84 billion, respectively, compared with the prior three months.
The cuts announced Wednesday will be across Treasury notes of durations between two and 30 years and, unlike the last two reductions in auction sizes, won’t include floating-rate notes.
Treasury also said Wednesday that it would offer $103 billion of debt next week through auctions of three, 10- and 30-year securities.