US Treasury Keeps Auction Sizes Steady, Introduces Buyback Plan

US Treasury Maintains Auction Sizes, Unveils Innovative Buyback Strategy: Implications for Investors and Market Stability

NEW YORK, May 1 (Reuters) - The Treasury Department has announced that it will maintain the current auction sizes for U.S. notes and bonds over the upcoming quarters, aligning with market expectations. This decision was revealed alongside a significant $125 billion refunding operation for the period from May to July, aimed at raising $17.2 billion from private investors.

The Treasury has also introduced a buyback program, with the first operation scheduled for May 29. This marks the first buyback since 2002, a strategic move to bolster market stability and provide liquidity support. The buyback initiative will include weekly operations, purchasing up to $2 billion in nominal coupon securities and up to $500 million in Treasury Inflation-Protected Securities (TIPS).

In a statement, the Treasury outlined its auction plans for next week, which include selling $58 billion in three-year notes, $42 billion in ten-year notes, and $25 billion in thirty-year bonds. The decision to keep auction sizes steady is based on projected borrowing needs, with the Treasury recently increasing issuance sizes for nominal coupon and floating rate note securities.

"The auction sizes were unchanged as expected, but the key here is that this is a pause in increases, not a reversal," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York. "The Treasury very clearly said they don't anticipate increasing auction sizes at least for the next several quarters. But they're still talking about an increase, not a decrease. Our view is that by mid-2025, Treasury may have to start increasing auction sizes again."

To address seasonal or unexpected changes in borrowing needs, the Treasury plans to adjust regular bill auction sizes and cash management bills over the next quarter. For TIPS, incremental increases will be maintained to ensure a stable share of TIPS as a percentage of total marketable debt.

Detailed Auction Plans

For the May to July quarter, the Treasury will:

Keep the ten-year TIPS reopening auction size at $16 billion for May.
Increase the June five-year TIPS reopening size by $1 billion to $21 billion.
Raise the ten-year TIPS new issue size by $1 billion to $19 billion for July.

Additionally, the Treasury expects to increase the four-, six-, and eight-week bill auction sizes in the coming days to meet liquidity needs around the end of May. Ahead of the non-withheld and corporate tax filing date on June 15, the Treasury will make modest reductions to short-dated bill auction sizes, returning them to near-high levels by July.

'Liquidity Support' Buybacks

Under the new buyback program, the Treasury will conduct weekly buybacks to support market liquidity. These buybacks will provide a regular opportunity for market participants to sell back less liquid, off-the-run securities to the Treasury.

Josh Frost, the Treasury's assistant secretary for Financial Markets, explained in a press briefing that buybacks are similar to other government outlays but have the unique feature of extinguishing marketable debt. This move is expected to enhance bond market liquidity, providing stability across the yield curve.

No cash management buybacks are planned for the May to July quarter, but they could begin later in 2024, depending on fiscal flows and market conditions. The Treasury will announce a tentative buyback schedule at each quarterly refunding.

The Treasury Borrowing Advisory Committee (TBAC) has proposed ways to reduce borrowing costs and expand the investor base, although these suggestions are currently exploratory. The Treasury also plans to change the regular six-week cash management bills into a benchmark bill, as part of the weekly bill issuance schedule, based on recommendations from primary dealers and TBAC.

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