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Debt ceiling, issuance cuts in focus for Treasury refunding

07/30/2021 | 02:35pm EDT

July 30 (Reuters) - The U.S. Treasury is unlikely to make any major changes when it announces its funding plans for the coming quarter next week, though investors will be looking for details on how it plans to navigate the reintroduction of the U.S. debt ceiling and any hints of future cuts to issuance.

The government’s two-year debt ceiling suspension will expire on Saturday, though it is expected to be able to get by until October or longer by using extraordinary measures. These may include suspending some investments and security issuance.

U.S. Treasury Secretary Janet Yellen last Friday said that Oct. 1, the first day of the next fiscal year, could be a critical date due to large federal outlays scheduled for then.

“The Treasury will be pretty preoccupied with their planning for the debt ceiling and all the plans for how they will stave off running out of cash under the debt ceiling in the next few months,” said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.

A large focus for the market is when the government is likely to reduce auction sizes, after ramping them up last year in order to pay for COVID-19 related spending.

Many analysts expect that the Treasury may announce reductions in its regular auctions of coupon-bearing supply beginning in November.

“I don’t know if they will give an explicit announcement that they will start cutting back in November, but once we get into the fall they will have a better sense of their funding needs and at the moment they are quite overfunded for next year,” said Goldberg.

Uncertainty when the debt ceiling may be lifted or suspended, however, could keep the Treasury mum on any future plans to cut issuance, at least for the time being.

“I don’t see any reason for them to pre-commit to that given all the uncertainty associated with the debt ceiling,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York, adding that he doesn’t expect “anything market moving,” from the refunding news.

The Treasury will announce its overall refunding plans on Monday and release details including the size of next month’s auctions on Wednesday.

(Reporting By Karen Brettell; Editing by Alden Bentley and Nick Zieminski)

ę Reuters 2021
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