Debt Limit Gums Up Treasury’s Plan for Supply Bump as Fed Tapers

(Bloomberg) – The U. S. Treasury has been planning for years how to deal with the funding gap set to open up when the Federal Reserve begins unwinding its $2.5 trillion hoard of the government’s debt.
Now there’s a new wrinkle to prepare for, as the latest deal to extend the nation’s debt limit complicates matters for Treasury Secretary Steven Mnuchin just as the Fed is expected to unveil the start of its balance-sheet reduction.
With the debt-cap suspension expiring Dec. 8, there’s a growing sense among investors and analysts that Treasury will have to slow or hold off on the inevitable – increasing note and bond sales to deal with the shift in Fed policy and rising federal deficits. Most strategists had predicted that long-term tilt toward more coupon issuance would start in November, so a delay may provide a boost for bond bulls betting yields can stay near historic lows.
‘The debt-limit issue will in the near-term affect what Treasury does with coupon issuance,’ said Gene Tannuzzo, a money manager at Columbia Threadneedle, which oversees $473 billion. ‘At the end of the day, Treasury will have to do a lot more coupon sales. On the margin, for now, if there is less coupon issuance it is a modestly positive technical’ for Treasuries.

This post was published at Wall Street Examiner on September 18, 2017.