On Wednesday, the U.S. Treasury Department announced its quarterly refinancing plan, increasing the auction size of long-term bonds for the first time in two and a half years. The newly disclosed refinancing bond issuance total comes to $1.03 trillion, exceeding the $960 billion from the previous quarter in May and surpassing the $1.02 trillion forecasted earlier this week.
The Treasury's specific refinancing plan includes issuing $42 billion in 3-year bonds on August 8 (an increase from $40 billion the previous quarter), $38 billion in 10-year bonds on August 9 (up from $35 billion), and $23 billion in 30-year bonds on August 10 (increased from $21 billion).
Although this quarter's issuance scale remains below the historical highs reached during the COVID-19 pandemic - with the record being $1.26 trillion in February 2021 - it significantly exceeds pre-pandemic levels. The overall issuance began to rise in 2018 to offset tax cuts, then surged in 2020 to provide funds for the U.S. federal government's response to the pandemic.
As anticipated by traders, the U.S. government plans to issue debt of various maturities on a larger scale. The Treasury Department indicated in a statement that due to expected medium- and long-term borrowing needs, it intends to gradually increase the issuance of coupon-bearing debt from August to October 2023.
The Treasury Department provided planned debt issuance scales, including:
- Issuance of 2-year and 5-year U.S. bonds will increase by $3 billion each month, 3-year bonds by $2 billion, and 7-year bonds by $1 billion. As a result, by the end of October this year, the auction sizes for 2-year, 3-year, 5-year, and 7-year bonds will increase by $9 billion, $6 billion, $9 billion, and $3 billion, respectively.
- New and reopening sizes for 10-year bonds will each increase by $3 billion, 30-year bonds by $2 billion, and 20-year bonds by $1 billion.
- Reopening sizes for 2-year floating-rate notes will increase by $2 billion in both August and September, and new issue size will increase by $2 billion in October.
- Reopening sizes for 30-year TIPS will remain at $8 billion in August, 10-year TIPS at $15 billion in September, and the new issuance size for 5-year TIPS will increase by $1 billion to $22 billion in October.
The U.S. government's borrowing needs are growing significantly. The Treasury Department announced this week that it expects the net borrowing scale for the current quarter from July to September to be raised to $1 trillion, far exceeding the department's $733 billion prediction in early May.
The aforementioned U.S. debt situation led to a downgrade by one of the three major rating agencies, Fitch Ratings. On Tuesday, Fitch downgraded the long-term foreign currency debt rating of the United States from AAA to AA+, changing the outlook from negative to stable. Fitch stated the downgrade reflects the country's expected fiscal deterioration over the next three years, a high overall government debt burden, and continued growth.
The U.S. government's aggressive debt issuance plan resulted in a selloff of U.S. bonds on Wednesday, with the 10-year Treasury yield rising about 10 basis points intra-day to 4.12%, the highest level since November of last year.
Josh Frost, Assistant Secretary for Financial Markets at the U.S. Treasury Department, stated that Fitch's downgrade had limited or even no impact on U.S. bond yields/prices. Frost expressed continued strong demand for U.S. bonds and argued that Tuesday's decision did not change what U.S. investors and people around the world already know: U.S. bonds remain the world's most important secure and liquid asset, and the U.S. economy's fundamentals are strong.
