Repo to the Rescue

#77: The tidal wave of T-bills have unlocked trillions.

This week, the United States Treasury released its latest Quarterly Refunding Announcement (QRA), outlining the Treasury’s debt issuance plans over the coming quarters, along with commentary and analysis on the state of the market. This regular announcement rarely earns mainstream attention, but in the current backdrop of burgeoning deficits and rising yields, this week’s QRA competed for top billing, even against the Fed’s FOMC decision on Wednesday.

The critical question was the size and composition of new issuance coming down the pike. In particular, investors worried that a large increase in the size of upcoming coupon¹ auctions could put further pressure on long-term U.S. Treasury (UST) yields which have surged in recent months, flirting with 5% for the first time in over fifteen years.

The market breathed a sigh of relief as the Treasury released a lower than expected total borrowing need for the current quarter and smaller increase in coupon auction size. Further, the increase in auction size was focused on the front-end of the curve, which has proven more sturdy than the long-end. A majority of new debt issuance over the next two quarters will come in the form of short-term Treasury-bills (T-bills).

Source: U.S. Treasury Quarterly Refunding Documents

But this profile should not be surprising.

For one, the Treasury did not want to risk exacerbating the sell-off in long-term Treasuries with upsized 10-30yr auctions. Second, since the Treasury expects interest rates to decline in the near term, it does not want to lock in high-cost long-term debt.

But the most significant benefit of this bill-heavy issuance is that it draws on funds from the Reverse Repo Facility (RRP) — putting otherwise “dead money” back into private market circulation.