The U.S. will probably boost Treasury-bill sales over the next few months to make up for a shortfall of cash due to the Federal Reserve’s plan to extend Operation Twist, Stone & McCarthy Research Associates said.
Fed policy makers said this week they’ll expand Operation Twist, their maturity-extension program, through year-end to keep borrowing costs low by selling or redeeming shorter-term U.S. debt in their holdings and buying an equal amount of longer-term securities. In the process, the Treasury will need to raise $33 billion as the central bank redeems bills and notes due by the end of the year, the firm said.
When the Fed reinvests maturing holdings at auctions, the Treasury issues securities to it in addition to what’s sold to the public, Stone & McCarthy’s Nancy Vanden Houten said in a note today. If the central bank lets holdings mature, the Treasury needs to raise the money by increasing the amount sold to the public or by drawing down cash. It will probably make “some modest increases in bill auctions,” she wrote.
“Most of the redemptions come in July, and a lot of that will be bills,” Vanden Houten, senior government policy analyst at the firm in Princeton, New Jersey, said in an interview. “By increasing the bill-auction sizes, it will allow the Treasury to accommodate the Fed’s redemptions. Overall, the amount of debt Treasury has to issue to the public over the next few years will be quite a bit bigger, because the Fed has sold back virtually all of its holdings to the public.”
The Treasury will increase the size of its weekly auction of four-week bills to $35 billion by early August, from $30 billion now, to accommodate the shortfall, Vanden Houten forecast.
After selling $400 billion in debt with maturities of three years or less in the current program, which was set to end this month, the Fed’s arsenal of short-term debt has been depleted. To finance the $267 billion in debt due in six to 30 years it plans to buy, the central bank will allow $33 billion of Treasuries due from July 1 to Dec. 31 to mature without reinvesting the proceeds in new debt. The Fed will sell $234 billion outright of Treasury debt.
The majority of the redemptions will come this summer, with $20 billion in July and $12 billion in August, according to the Fed Bank of New York’s website. In July, $18.4 billion of that redeemed will be four-week Treasury bills, with the remainder in coupon securities, according to Stone & McCarthy.
The rate on the one-month Treasury bill, which was 0.0356 percent today, has averaged 0.0243 percent over the past year. The rate was just under 5 percent in January 2007, before the collapse of the subprime lending market triggered the worst financial crisis since the Great Depression.
Fed policy makers have kept the benchmark interest rate in a range of zero to 0.25 percent since December 2008. In their statement on June 20, they reiterated that economic conditions will probably warrant keeping the rate “exceptionally low” at least through late 2014.
“Without reinvestment, the Treasury will have to keep bill sizes more elevated than otherwise to make up for the lost add- on amounts at the auction,” Stanley Sun, an interest-rate strategist at Nomura Holdings Inc. in New York, co-wrote with George Goncalves, the bank’s head of interest-rate strategy, in a note published today.
Nomura expects four-week bill auction sizes to increase by about $5 billion by about mid-July.
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