US Treasury announces cut in coupon issuance

Bond traders will underwrite less government debt in the coming quarter for the first time since 2010 after the US Treasury said it would cut debt sales - reflecting its plans to introduce new floating rate notes next year and an improving federal budget deficit.

Cuts in Treasury debt sales for so-called coupon issues will start in the coming quarter and involve the two-, and three-year note maturities, said the US Treasury on Wednesday.

The move comes as the US budget deficit for the 2013 financial year is forecast to fall towards $650bn from $1.024tn for the prior year.

Treasury said: "The magnitude of offering size reductions will depend on the pace and extent of the fiscal improvement."

During a follow-up press conference on Wednesday, the US Treasury said initial reductions in auction sizes would be only $1bn.

Lou Crandall, economist at Wrightson Icap, said: "We suspect there may be room for more cuts in the fourth quarter but that is uncertain at this point."

Analysts at Credit Suisse expected the pace of reductions in issuance size would accelerate and total $6bn to $8bn over the next few quarters in the two, three- and five-year sectors.

The US Treasury also published a final rule for its floating rate note programme and said it expected the first sale would occur in January.

The US Treasury will announce further details in the next quarterly refunding statement in November.

Traders expected that floating rate note issuance would total $150bn in the first year before reaching $300bn when the new issue was fully operational - thus requiring cuts in regular coupon sales.

"Auction sizes will need to be reduced, in part due to smaller deficits and in part to make room for the new floating rate notes," said RBC Capital Markets.

The move to cut Treasury shorter term coupon sales will also help extend the average maturity of outstanding US debt, which currently stands at 64.5 months and is expected to rise to 80 months by 2022.

While the average maturity of US debt has extended in recent years, it trails other sovereign borrowers, notably the UK's level of 14 years.

The Treasury Borrowing Advisory Committee, a group of bond dealers and investors that meets every quarter with US Treasury officials, agreed this week that short dated issuance be cut in order to meet its long-established goal to increase the weighted average maturity of US government debt.

"The committee emphasised the importance of making gradual and modest adjustments to the issuance schedule in order to maintain future financing flexibility in light of the uncertainty regarding economic growth, budget-related matters and the trajectory of future tax receipts," said the TBAC in its report to the Secretary of the Treasury.

For August, the refunding will consist of selling a $32bn three-year note, a $24bn 10-year note and a $16bn 30-year bond.

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