U.S. Treasury to introduce new two-month bill, increase coupon sizes

WASHINGTON (Reuters) – The U.S. Treasury said on Wednesday it will introduce a new benchmark 2-month bill starting in October 2018 and also increase the size of its debt auctions in the coming months.

The measures are to deal with a rising budget deficit and fill gaps left by the Federal Reserve continuing to reduce its massive bond portfolio.

Rising federal borrowing, while not entirely a surprise, rekindled some concerns about its effect on the bond market, lifting the 10-year Treasury yield () to 3 percent for the first time since mid-June.

“Some of the selling in the bond market can be attributed to the auction sizes continuing to increase,” said John Canavan, market strategist at Stone & McCarthy Research Associates in New York.

The new 2-month bill will settle on a Tuesday, unlike the department’s traditional settlement day of Thursday, Deputy Assistant Secretary for Financial Markets Clay Berry said in a statement.

He said the first auction for the 2-month bill will be announced on Oct. 15, 2018.

Treasury said that it will increase the sizes of the 2-,3- and 5-year note auctions by $1 billion per month over the next three months. It will also increase auction sizes by $1 billion for each of the next 7- and 10-year notes and 30-year bond auctions in August and hold auction sizes steady at that level through October.

It will also boost the auction size of its next 2-year floating rate note issue by $1 billion.

The U.S. fiscal deficit is expected to hit $833 billion this year, up from $666 billion in the budget year ended last September, according to the Treasury’s June budget report.

The U.S. central bank has also been gradually cutting its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities, which it bought in the wake of the 2007-2009 financial crisis and recession.

The Treasury announcement follows previous increases in auction sizes following the department’s quarterly meetings in February and May.

On Monday, the Treasury said in a statement it expects to issue $329 billion through credit markets during the July-September period, assuming an end-September balance of $350 billion.

The borrowing estimate for the third quarter is the highest since the same period in 2010 and fourth largest on record for the July-September quarter.

In its quarterly refunding announcement, Treasury said it would auction $78 billion in coupon debt next week and was still studying the possibility of an additional sale of 5-year TIPS securities in the second half of the year.

It said auction sizes of TIPS would remain unchanged over the next quarter.

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