The bump in issuance showcases the rising borrowing needs that contributed to Tuesday’s decision by Fitch Ratings to lower the sovereign US credit rating by one level, to AA+. Fitch said it expects US finances to deteriorate over the next three years. That’s from an already enlarged position — the Treasury is pencilling in some $1 trillion worth of issuance in all this quarter.
Ahead of the announcement, dealers had also laid out expectations for stepped-up issuance of other securities, and for the boosts in sales to stretch into 2024, which the Treasury confirmed on Wednesday.
“While these changes will make substantial progress towards aligning auction sizes with intermediate- to long-term borrowing needs, further gradual increases will likely be necessary in future quarters” the department said in a statement.
The original downgrade in 2011 was a non-event for the bond market because demand was ample. This time around the Treasury is increasing borrowing and expects to issue more than the market expected. The fact this event was followed by stronger employment numbers suggests scope for higher rates. Bonds are a market like any other and more supply against a low demand environment is negative for prices.
10-year yields continue to extend the move above 4% and closed at a new 8-month high. The rally in yields has narrowed the inverted condition between the 10-year and 2-year by 30 basis points in less than a month. There is still a long way to go before the inversion is fully unwound but the chances a nadir has been reached are increasing.
My long position TLT is not looking smart but is unleveraged and I am willing to hold a while longer because I do expect a breakout in yields to hold.
The US Dollar is firming on a flight to quality tailwind.
The challenge for stock market investors is higher yields are a further headwind to borrowers. Greater issuance of Treasuries also siphons liquidity out of the banking sector. That could result in the stock market reverting back to the trend mean as higher yields emphasise the valuation mismatch between the risk-free rate and the stock market.