US Treasury Plans Record $126 Billion in Q1 Bond Auctions Ahead of Biden Stimulus

The U.S. government could flood bond markets with a record $1.84 trillion in new paper this year, but its first quarter sales won't overwhelm investors just yet.
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The U.S. government will sell a record $126 billion in benchmark bonds this quarter as it attempts to cover a record budget deficit bloated by pandemic-related costs and legacy tax cuts. 

The overall funding target for the quarter, however, of $274 billion came in far less than the $1.2 trillion forecast thanks in part to an increase in the sales of bond auctions last year that boosted the Treasury's cash balances to around $1.7 trillion. 

“Since April 2020, Treasury has substantially increased issuance sizes for nominal coupon and (floating-rate note) securities," the Treasury said in a statement Wednesday. "Treasury believes that these changes have created sufficient capacity to address near-term projected borrowing needs.” 

The Treasury said it will sell $58 billion in 3-year notes on February 9, $41 billion in 10-year notes the following day and $27 billion in 30-year bonds on February 11. After the retirement of existing debt, the auctions will raise a net total of $63.1 billion, the Treasury said.

But with Democrats ready to approve another $1.9 trillion in stimulus aimed at extending the economy's COVID rebound, as well as ongoing reduction in revenue linked to the 2017 corporate tax cut that the non-partisan Congressional Budget Office has said will cost $1.9 trillion between 2018 and 2027, bond markets are braced for even more issuance in the months ahead. 

In fact, the new spending commitments, alongside legacy costs linked to tax cuts, will mean the Treasury will likely issue a record net of $1.84 trillion in new bonds this year, according to JPMorgan Chase, a figure that's more than four times last year's total.

"Neither the president-elect nor I, proposed this release relief package without an appreciation for the country’s debt burden," Treasury Secretary Janet Yellen said during her confirmation hearing in Washington last month. 

"But right now, with interest rates at historic lows, the smartest thing we can do is act big. In the long run, I believe the benefits will far outweigh the costs, especially if we care about helping people who’ve been struggling for a very long time," the former Federal Reserve chairwoman added.

Total U.S. debt is now approaching $30 trillion, and will likely pass that mark once President Joe Biden's stimulus clears Congress later this month. 

That's a staggering 57% increase from levels seen in the early days of the Trump administration, swelled by corporate tax cuts and below-trend growth, and exacerbated by costs linked to the onset of the pandemic last year and the ensuing myriad of relief efforts.

Still, one key attraction for investors looking to fund America's spending commitments is that they draw the interest of foreign investors looking for higher rates of return on risk-free assets.

With some $18 trillion in global government bonds currently trading with negative yields -- including all outstanding German government bonds -- as central banks around the world hold rates at record lows and hoover up trillions in debt through quantitative easing programs, the current 1.1% return on 10-year Treasury notes is a steal.

In fact, in a sale of 30-year bonds by the Treasury earlier this month, foreign buyers scooped up 68.6% of the $24 billion available for auction, with bids totaling $2.47 for every $1 on offer.