Auction sizes peaked in 2009 as the government borrowed to revive growth after the biggest quarterly contraction since 1958. Two-year note monthly sales reached $44 billion, three-year offerings $40 billion and five-year auctions $42 billion.
The Treasury borrowed a record $2.249 trillion at its note and bond auctions in 2010, up from $581 billion in 2007. It sold $2.153 trillion last year.
Beginning in 2009 the department focused on extending the maturity of its debt to lock in record low rates, resulting in a decline in bills available to money market investors. The average maturity of U.S. debt was 64.5 months in March, up from a 24-year low of 49.4 months in 2009.
The government will be able to reduce borrowing because the economy continues to grow, while more slowly than in previous recoveries, even amid $85 billion in across-the-board spending cuts that began in March as a result of lawmakers’ inability to agree on a budget.
U.S. GDP grew at an annualized pace of 2.5 percent in the first three months of the year after growth slowed to a more- than-three-year low of 0.4 percent in the final quarter of 2012, the Commerce Department said April 26.
The economy has added an average of 179,000 jobs a month in the past two years, a faster pace than during the same period before the start of the financial crisis which began in August 2007, Labor Department data show. The country hasn’t made up the 8.7 million jobs lost since January 2008.
As the government’s need for emergency cash for unemployment and other benefits soared in 2008 and 2009, the Treasury sold $1 trillion of short-term bills, boosting the amount outstanding to $2.07 trillion.
Since then the supply of Treasury bills has fallen to $1.7 trillion, or 14.9 percent of the government’s $11.4 trillion of marketable debt outstanding, from a peak of 34.4 percent in December 2008. Securities maturing in three years or less have fallen to 49.5 percent this year from 60.2 percent in 2008, according to the Treasury.
The decline may mean the Treasury’s likely cut of two- and three-year note auction sizes would be aimed to limit reductions of bills used by investors in the money market, Thomas Simons, a government-debt economist in New York at Jefferies, said in an interview May 6.
The one-month bill rate dropped to negative 0.0051 percent on May 6 amid expectations of reduced sales ahead after the Treasury announced it plans five days earlier to sell between $10 billion and $15 billion in two-year floating-rate notes by as early as the fourth quarter.
James Clark, deputy assistant secretary for federal finance, said the floating notes would initially serve as a replacement for some bills, according to minutes of an April 30 meeting of the Treasury Borrowing Advisory Committee, or TBAC, the bond dealers and investors who meet quarterly with department officials.
“The floaters will ultimately take away from some Treasury bill supply,” Jerome Schneider, head of the short-term strategies and money markets desk at Newport Beach, California- based Pacific Investment Management Co., said in a telephone interview on May 9. “Overall, if the Treasury doesn’t need to borrow as much money, and we know that 2014 has a better fiscal picture than 2013, we should expect supply in general to go down.”
Fewer shorter-term securities may lead to a rush to buy debt that banks may use as high-quality collateral. The need for safer assets, including government bonds, will grow by as much as $5.7 trillion by 2020 as the 2010 Dodd-Frank Act in the U.S. and capital standards set by the Bank for International Settlements in Basel, Switzerland, require more top-graded debt as loss reserves, TBAC said in a May 1 report.
“There’s already a collateral shortage,” Thomas di Galoma, head of U.S. rates sales at ED&F Man Capital Markets in New York, in a May 8 telephone interview. “If they bring smaller issues, there will be increased demand for them out of the chute.”