The US economy may soon see reduced sales of government debt come autumn, as spending measures associated with the Covid-19 pandemic may no longer be needed in such an extraordinary capacity.
The Treasury has revealed that it is planning to announce new reductions on its auction sizes as early as November, but kept current issuance of $126 billion unchanged for the third quarter. The latest proposed cutbacks, which would be the first of their kind in more than five years, come as financial markets anxiously await news of a bond purchase tapering from the Federal Reserve, particularly as the US economic recovery continues to strongly accelerate.
Even before the Covid-19 pandemic, debt issuance was already surging, as the US economy was allocating trillions of dollars towards various stimulus programs. Budget deficits also expanded during the Donald Trump presidency, after his administration initiated various tax cuts. However, over the past several months, any new, significant spending measures have not been passed by Congress, suggesting that the continued need for such exceptional monetary support may no longer be needed.
In the event that the ongoing quantitative easing measures decelerate in the near term, it would reduce bond supply, ultimately helping boost bond prices higher. The Treasury Borrowing Advisory Committee, which provides debt management advice to the US government, has suggested tapering “less loved” notes, such as seven- and 20-year Treasuries. Bond prices rallied ahead of the Treasury’s statements, and maintained their gains following the announcement.
The yield on the 10-year Treasury slumped to 1.17%, while yields on the more sensitive 5-year note declined to 0.67% at the time of writing.
Information for this briefing was found via the US Treasury. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
