The Federal Reserve may have to adjust its bond purchase program to accommodate the massive long-term debt issuance planned by the Treasury Department, strategists say.
Public bond prices fell on Wednesday. That raised yields, which were at levels near record lows, after the Treasury outlined plans to place a record $ 112 billion in debt next week at 3, 10 and 30 years.
He also announced for the next three months higher long-term debt auctions to finance aid packages approved by US lawmakers since March and the new stimulus bill currently being debated in Congress.
Strategists now warn that indigestion in the bond market could occur if the US central bank does not change the focus of its bond purchases that target long-term debt.
“The Treasury is increasing pressure on the Fed to extend the duration of its purchases,” said Priya Misra, global head of rate strategy at TD Securities. “It’s almost a necessity now. Without that, we could have a messy Treasury market both in terms of operations and auctions.”
Ten-year bond auctions will be $ 38 billion, $ 6 billion higher than the previous quarter, the Treasury reported, while in the case of 20 and 30-year debts they will increase by $ 5,000 and 4,000 million, respectively.
If you add the expected increase in auctions of bonds to two, three and five years, and other instruments, according to the Treasury that represents an additional issue of $ 132 billion in the next three months compared to the previous period.
Until now, bond investors have largely ignored the global rise in public debt issuance, betting that it would be offset by also generous central bank bond purchase programs.
But the magnitude of the latest issuance increase took market participants by surprise.
After the announcement, 10-year Treasury bond prices fell, causing yields to rise from the low levels reached on Tuesday. Yields on the 20- and 30-year bonds also increased, as did the seven-year notes.
The strategists warn that the debt estimates presented by the Treasury – an additional $ 2.2 trillion by the end of the year – could go even higher if another fiscal stimulus package emerges beyond the one currently being debated.
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