There were no surprises in the Treasury's announcement of the quarterly refunding, a $78 billion package to refund $38.2 billion Treasury notes maturing on August 15, 2018 and raise $39.8 million in new cash. The refunding package consists of $34 billion in 3-year notes, $26 billion in 10-year notes, and $18 billion in 30-year bonds. The balance of the funding needs will be met with the weekly T-bill auctions, cash management bills, the monthly note and bond auctions, the August 5-year Treasury Inflation-Protected Securities (TIPS) reopening auction, the September 10-year TIPS reopening auction, the October 30-year TIPS reopening auction, and the regular monthly 2-year Floating Rate Note (FRN) auctions.
Treasury also announced its intention to begin auctioning a new benchmark 2-month (8-week) bill starting in October. Unlike other bills which settle on Thursday, the new 2-month bill will settle on Tuesday, with the first auction to be announced on October 15.
As in the previous refunding, Treasury announced additional increases in nominal coupon auction sizes in response to increased borrowing needs resulting from changes in the Federal Reserve's reinvestment policy for its System Open Market Account (SOMA) portfolio as well as the fiscal outlook. As a result, the size of each of the 2-, 3-, and 5-year note auctions will increase by $3 billion by the end of October. In addition, the size of the next 2-year FRN auction in August will be increased by $1 billion, and the sizes of each of the next 7- and 10-year notes and the 30-year bond auctions in August will be increased by $1 billion and held steady at that level through October. These increases to coupon and FRN issuance will result in an additional $30 billion of new issuance in the quarter, $3 billion more than in the previous quarter.
Treasury said it anticipates t-bill supply to gradually increase by September to the level last seen in March as seasonal funding needs rise, in line with historical patterns.
Although auction sizes for TIPS will remain unchanged over the quarter, adjustments to the TIPS auction calendar are still being evaluated, including the possible introduction of a second new 5-year TIPS in the second half of the year. Treasury said it continues to meet with TIPS market participants to discuss operational considerations of adding the new issue to the calendar, and that it will likely announce any modifications to the TIPS auction calendar or auction sizes in the November quarterly refunding.