Treasuries -- the benchmark 30-year bond in particular -- are rallying this morning because in
announcing the details of next week's quarterly refunding, the
said the November refunding won't include a new 30-year bond.
Because the federal government has gradually converted its huge budget deficits of the early '90s to surpluses (the deficit peaked in fiscal 1992 at $290 billion, and by fiscal 1998 had become a $69 billion surplus), the Treasury has gradually reduced the number and frequency of its debt auctions. With a $99 billion surplus projected for this year, and even larger ones projected for subsequent years, additional changes along those lines were expected.
Elimination of the November bond auction (the Treasury will continue to sell five- and 10-year notes in the November quarterly refunding) has long been considered an extremely likely scenario. The Treasury in 1992 stopped issuing a new 30-year bond in the May refunding, so eliminating the November bond is a logical next step.
But traders didn't think the Treasury would eliminate
November bond. Surely it would give the market more than three months' notice, they reasoned. "The biggest uncertainty in the short run is the November bond,"
Money Market Observer
told clients last week. "As we have said before, we think the odds are very good that the Treasury will eliminate the November bond auction in 2000, but it is getting late to do so this year. We think there is only a 10% chance that the Treasury will announce the elimination of the Q4 bond auction at this refunding."
Evidently, many people agreed with those odds. The long bond is rising in price to account for the unexpectedly reduced supply. It was lately 21/32 higher at 88 9/32, trimming its yield 6 basis points to 6.11%.
Otherwise, the refunding announcement contained few surprises. The Treasury said it will sell $15 billion of five-year notes, $12 billion of 10-year notes and $10 billion of 30-year bonds next Tuesday, Wednesday and Thursday. Those amounts are unchanged from the most recent refundings, in line with expectations.
announced a proposed rule under which the Treasury could buy back outstanding Treasury securities, as an alternative to further cutting back on new issues, since reducing new issuance impairs market liquidity. This development had also been expected for some time.
The Treasury has not decided whether it will ultimately conduct so-called debt buybacks, Under Secretary for Domestic Finance Gary Gensler said at the quarterly refunding press conference.
The fact that interest rates are much lower now than when much of the federal government's debt was issued may be an impediment to debt buybacks. The fall in interest rates has lifted the prices of many Treasury securities into premium territory -- the bonds are worth more than their face value. So theoretically, in order to buy them back, the government would have to account for the premiums as expenditures.