The US Treasury Department's decision to increase buybacks of long-dated bonds, with no ceiling on purchases, is creating uncertainty for the issuance of short-term Treasury bills, which are expected to fund the larger buyback operations. This move came just two weeks after the Treasury stated buybacks would continue at the same size and projected a seasonal drop in T-bill supply in September due to corporate tax inflows.
Analysts are expressing skepticism about the Treasury's guidance. Thomas Simons, chief US economist at Jefferies LLC, stated, "Forecasting bill supply was quasi impossible before, so this only makes it slightly more difficult." While the additional funds needed are relatively small compared to the total issuance of almost $2.25 trillion in bills per month, the shift has prompted re-evaluations among dealers.
Wells Fargo & Co. estimated that if sustained, the increased buyback pace could reach $32 billion per quarter. This would necessitate an extra $12 billion in T-bill issuance through November 5, and $16 billion per quarter thereafter. However, Gennadiy Goldberg, head of US interest rate strategy at TD Securities, downplayed the immediate impact, noting, "It's just a few billion, which I realize is a lot of money, but won't change their auction size reduction plans materially."
Despite the relatively small amounts, the unlimited nature of the buybacks means that the total impact on T-bill supply is currently unknown. This lack of predictability makes forecasting future bill supply more challenging for market participants. The next quarterly refunding announcement on November 5 is expected to provide more clarity on the long-term policy implications of these expanded buybacks.
