Treasury Debt Policy Is Mystifying

 On Wednesday, the Treasury sold a total of $68.63 billion of debt, with $36.63 billion going under the 17-week maturity. Investor interest in this batch was relatively speaking lower than in the past five auctions: with $100.91 billion tendered, the T/A ratio fell to 2.75, the lowest since the end of November. 

While the T/A fell, the median yield rose to another record high for this maturity: 4.625 percent. This is up from 4.51 percent last week, which at the time was the highest thus far for the 17-week bill, which has only been offered at auctions for 13 weeks so far. 

Since there was no maturing batch under this maturity class, the expected annualized increase in the debt cost equals the full annualized $1.694 billion payout for the auctioned batch.

The remaining $32 billion auctioned today, was sold in the form of 10-year notes. Attracting $80.84 billion, the 2.53 T/A, an increase from the last batch of 9-year, 10-month notes, suggests that the Treasury could have sold more debt here. That would have been wise: the median yield came out to 3.499 percent, down from 3.5-4 percent at the last three auctions.

The maturing batch of 10-years amounted to $21 billion and paid 1.82 percent. This means that today's auction added $737 million to the annualized debt cost, for a total debt-cost increase of $2.431 billion.

The strategy behind the Treasury's debt auctions remains a mystery. As of today, an estimated 16.8 percent of the debt consists of bills maturing in one year or less; 65.5 percent is notes maturing in 2-10 years; and 17.7 percent is bonds that run for 20 or 30 years. These proportions are noticeably different from three months ago, when bills only accounted for 15.1 percent of the debt and 67.1 percent consisted of notes. 

Both the secondary market and the auctions have pushed interest rates up over the past three months. The estimated average rate on the total U.S. debt has now reached 2.24 percent, up from 1.87 percent on October 1 (the start of the fiscal year). This is partly due to the rollover effect (see the 10-year auction reference above), partly the slow increase in the short-maturity share of the debt. Since the Treasury has to sell the short-maturity securities at higher rates, and since the same trend is visible in the secondary market, one has to ask why the Treasury is doing this. Why are they not taking more advantage of the relatively moderate rates on long-maturity securities?

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We do not give investment advice. 

This blog provides analytical information solely for the purposes of 1) predicting the cost of the federal debt, and 2) for assessing the risk for a U.S. fiscal crisis. All information published here, forecasting and other, is based on publicly available data from the U.S. Treasury, including but not limited to approximately 65 percent of the current debt; on macroeconomic data, including but not limited to monetary policy decisions by the Federal Reserve; and on macroeconomic theory.