This morning, in addition to a rather mundane sale of $40.0 billion in 4-week bills, the Treasury sold its inaugural 8-week (2 month) bill, for the amount of $25.0 billion as the Treasury seeks innovative ways to plug the burgeoning budget deficit.
As a reminder, this is what the TBAC said when it introduced the 2-Month bill back in May:
Treasury intends to introduce a new 2-month bill later this calendar year. Treasury has had extensive discussions about the benefits of a 2-month bill offering with a variety of market participants, including the Treasury Borrowing Advisory Committee (TBAC). Our analysis suggests that this new product will meet the needs of many investors, while also enhancing Treasury cash management, reducing operational risks, and helping us in our mission to fund the government at the least cost over time.
In the coming months, Treasury will further study operational details related to offering the 2-month bill for settlement on a date different from the traditional Thursday settlement date for Treasury bills, such as Tuesday. Treasury will explore alternative ways to enhance liquidity of the 2-month bill, if it is offered on a different settlement date, such as moving the settlement date of an existing bill tenor so that it aligns with the settlement date of the 2-month bill.
Reinforcing the need for a 2-month bill, the TBAC said this introduction would allow for smaller auction sizes in other tenors, “allowing for greater flexibility in funding future projected financing gaps.” Of course, it would also mean greater cumulative Bill issuance, and even more flattening pressure.
The TBAC’s conclusion:
Observed congestion around the current auction cycle creates capacity and potential operational risk.
This committee has previously recommended 25% to 33% of the financing gap to be funded with T-Bills. This is projected to significantly increase T-Bill auction sizes.
Heavy settlement volumes on Thursday has a negative impact on funding markets and increases Treasury’s concentration of funding risk.
Introducing a 2m point at a new settlement date can alleviate both problems – reducing supply per issue and per day.
So what did today’s first ever 2-Month auction reveal? Well, with the The WI trading at 2.170% for the 8-week bill, the inaugural $25BN auction priced on the screws, with a high yield of 2.17% (while also selling $40BN in 4 week bills) .
Some more details:
With $78.3BN in total bids for $25.0b in bills sold, the Bid to Cover for the 8-Week bill was 3.13x (vs 2.81x for the 4-Week).
Indirect bidders were awarded 22.9% (vs 23.5% for the 4-Week)
Direct bidders awarded 15.1% (vs 10.8% for the 4-Week)
Dealers were awarded 62% (vs 65.7% for the 4-Week)
A little more context: after a transition period, the 8-week bills will be announced on Tuesdays, auctioned on Thursdays, and settle on Tuesdays. As Oxford Economics notes, in order to enhance the liquidity of the issue, 4-week bill auctions will also shift to that schedule and will be reopenings of the 8-week bills.
The 8-week bills will maintain the current schedule of Monday announcements, Tuesday auctions, and Thursday settlements during the transition period, but will have a slightly shorter maturity and will mature on Tuesdays. From November 8 to December 3, the 4-month bill will be announced as reopenings of the 8-week bill, and the 4-week bills during that time will also have a slightly shorter maturity and will mature on Tuesdays.
In light of the strong demand for this – and any paper – it does not seem that the Treasury will have any problems maintaining or raising supply at this tenor, and before it’s all over, we may get 4 Month, 5 Month, 7 Month – you get the picture – Bills as the US now finds itself staring into a debt funding abyss over the coming years.