Bloomberg News

Wall Street Dealers See Treasury Sales Falling to 6-Year Low (3)

January 27, 2014

The U.S. will borrow less money this year than at any time since 2008, validating the nation’s decision to go deeper into debt to combat the financial crisis as faster growth shrinks the deficit, Wall Street’s biggest bond dealers say.

The government will sell $717 billion of notes and bonds on a net basis, 14 percent less than last year, according to a survey of primary dealers which are obligated to bid at Treasury auctions. Issuance has fallen every year since the U.S. borrowed a record $1.607 trillion in 2010, data compiled by the Securities Industry and Financial Markets Association show.

Helped by the Federal Reserve’s unprecedented stimulus, the Obama administration’s deficit spending has enabled the American economy to recover faster from the first global recession since World War II than European countries that chose austerity. With the U.S. expansion forecast to narrow the budget shortfall to a six-year low this year, the drop in bond supply may support Treasuries as the Fed pares its own debt purchases.

“If the economy picks up as we expect and tax receipts improve further above what the Treasury is expecting, we could see further cuts in issuance,” Brett Ryan, U.S. economist at Deutsche Bank AG (DBK), one of the 21 primary dealers that trade with the Fed, said in a telephone interview from New York. “Monetary policy was trying to ease the drag. We’re getting very close to point where we are in a sustainable growth phase.”

Recurring Pattern

Excluding debt issued to refinance maturing obligations, the 14 primary dealers that responded to the survey predict net sales will be the least since $380 billion of interest-bearing Treasuries were sold in 2008.

Deutsche Bank said the U.S. will raise a net $600 billion from bonds, the lowest forecast in the survey. The Frankfurt-based bank’s estimate is 28 percent less than last year’s amount of $835.9 billion, data compiled by Sifma show.

All 14 dealers anticipate the U.S. will auction less than last year’s net issuance. Morgan Stanley (MS:US) had the highest forecast with $830 billion of sales this year.

“Everything’s lining up for this to be the pattern going forward rather than a temporary blip,” Drew Matus, an economist at primary dealer UBS AG (UBSN), said by telephone from Stamford, Connecticut. UBS predicts $700 billion in net sales this year.

Total issuance of notes and bonds with maturities from 2 years to 30 years will slip to $2.137 trillion, the least since 2011, from $2.14 trillion last year, the survey showed. All projections exclude bills, which are due in one year or less.

AAA Mien

U.S. budget deficits topped $1 trillion in the first four years after 2008, when the worst financial crisis since the Great Depression prompted the government to ratchet up spending to bail out the nation’s banks and revive the economy.

The amount of marketable U.S. debt obligations more than doubled to $11.9 trillion as the government sold more bonds to finance the increased outlays.

Demand for Treasuries (USGG10YR) was aided by the Fed, which dropped its benchmark interest rate close to zero in 2008 and started its purchases of government bonds and mortgage-backed securities, which worked to suppress borrowing costs by inundating the U.S. economy with more than $3 trillion.

While the government’s debt-financed largess caused the U.S. to fall from the ranks of the most-creditworthy nations for the first time since Standard & Poor’s rated it AAA seven decades ago, the stimulus policies restored economic growth and rewarded bondholders with record-low yields.

European Malaise

The $16.2 trillion U.S. economy, the world’s largest, is forecast to expand 2.8 percent in 2014 and accelerate 3 percent next year, which would be the fastest in a decade, according to economists surveyed by Bloomberg.

European countries have taken longer to rebound as governments ensnared by the region’s sovereign debt crisis responded with higher taxes and public-spending cuts, plunging the euro area into its longest-ever recession.

The 18 nations that use the common currency, which include Germany, France, Spain and Italy, have on average either contracted or grown less than the U.S. every year since 2008, estimates compiled by Bloomberg show. The region’s gross domestic product will increase just 1 percent this year and 1.4 percent in 2015, less than half the rate of the U.S.

The euro area’s joblessness will remain at 12.1 percent for a second year, the highest annual rate since at least 1990, forecasts compiled by Bloomberg show. In the U.S., the unemployment rate will drop to 6.6 percent this year, the fourth straight annual decline and lowest since 2008.

Austerity Kills

“It seems like it’s better to boost GDP rather than put in austerity and then kill GDP,” Stanley Sun, a New York-based strategist at Nomura Holdings Inc. (8604), a primary dealer, said in a telephone interview. Nomura anticipates $820 billion in net Treasury sales this year.

Faster economic growth and falling unemployment in the U.S. has slowed the build-up of debt as a proportion of GDP to 70 percent, less than two-thirds of the 24 developed nations tracked by Bloomberg. Higher corporate and individual tax receipts has prompted dealers in the Bloomberg survey to predict the U.S. budget deficit will decline by about $50 billion to $629 billion, the least since 2008.

While the strengthening economy has supported the case for the Fed’s pullback from bond buying and caused Treasuries to suffer their first losses since 2009 last year, the decrease in U.S. debt sales may help bolster demand after yields surged.

Treasuries are off to their best start to a year since 2010. The $8.3 trillion of notes and bonds included in the Bank of America Merrill Lynch Treasury Index has risen 1.3 percent in January, rebounding from last year’s 3.4 percent slump.

Entitlement Spending

Yields on 10-year Treasuries, which soared from 1.6 percent in May and ended above 3 percent at the highest level since 2011 last month, have since tumbled as a rout in emerging markets prompted investors to seek refuge in the safest assets.

The 10-year yield fell for a fourth week to end at 2.72 percent as of Jan. 24, and was at 2.75 percent as of 1:51 p.m. New York time, according to Bloomberg Bond Trader prices. The price of the 2.75 percent note due November 2023 fell 9/32, or $2.81 per $1,000 face amount, to 99 31/32.

Smaller deficits may be short-lived because government costs for retirement and health care are poised to surge in the coming decade. Spending on Social Security will rise 67 percent to $1.414 trillion in 2023 from $848 billion this year, while spending on programs including Medicare and Medicaid will almost double to $1.808 trillion in 2023, estimates from the Congressional Budget Office released in May show.

Deja Vu

“Entitlements are still an issue that has to be tackled,” Aneta Markowska, the chief U.S. economist at Societe Generale SA (GLE), said in a telephone interview from New York.

Last month’s record surplus, bolstered by payments from Fannie Mae and Freddie Mac, the mortgage-finance companies bailed out with $187.5 billion in taxpayer money, aren’t sustainable while standoffs between President Barack Obama and Congressional Republicans make further compromises over the nation’s finances less likely, according to Stephen Stanley, chief economist at Pierpont Securities LLC.

The U.S. faces the prospect of a second stalemate over the nation’s borrowing authority as soon as next month as the debt-limit suspension expires on Feb. 7. Last week, four-week Treasury bill rates jumped to the highest since November, one month after a political dispute caused a 16-day government shutdown, as Treasury Secretary Jacob J. Lew reiterated a call for Congress to raise the limit as soon as possible.

“It’s a mistake to be optimistic on the path of the deficit,” Stanley said by telephone from Stamford, Connecticut. “The Treasury will likely have to ramp up issuance.”

Foreign Attraction

Economists are already forecasting higher U.S. borrowing costs this year as the Fed scales back. Yields on the 10-year note will rise to 3.45 percent by year-end, according to the median estimate of 70 forecasters surveyed by Bloomberg.

The Fed decided in December to reduce its monthly debt purchases to $75 billion from $85 billion, starting in January. Economists surveyed by Bloomberg this month said the bank will pare by the same amount in each of the next six meetings before ending its stimulus in December.

Higher yields may help attract more foreigners, which hold almost half the U.S. debt obligations, and help temper any drop-off in demand, according to Andres Garcia-Amaya, global market strategist at JPMorgan Chase & Co. (JPM:US)’s mutual funds unit, which oversees $400 billion.

China, the largest foreign holder of Treasuries, increased its stake to a record $1.317 trillion in November, government data released on Jan. 16 showed. Japan, the second largest, boosted its holdings to an all-time high of $1.186 trillion.

Floating Rates

The Treasury is also introducing its first new security in 17 years to attract debt investors seeking to protect themselves from rising rates. The U.S. will sell $15 billion in floating-rate notes on Jan. 29. To accommodate the new issuance, Jefferies Group LLC says the U.S. will trim two-year and three-year fixed-rate notes at its monthly auctions by $2 billion each, to $30 billion and $28 billion, respectively.

“As rates go up, that should welcome more bids especially from foreign investors,” Garcia-Amaya said in a telephone interview from New York.

Primary Dealer    2014 Net Issuance Forecast

Deutsche Bank              $600 BLN
JPMorgan                   $626
Jefferies                  $655
Mizuho                     $680
SocGen                     $691
BNP Paribas                $700
Cantor Fitzgerald          $700
UBS                        $700
Bank of America            $719
Credit Suisse              $736
RBS                        $785
Barclays                   $791
Nomura                     $820
Morgan Stanley             $830

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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