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The U.S. Treasury Department recently announced that it will decrease the speed at which it raises its longer-dated debt auctions in the last quarter of 2023 and the first month of 2024, consequently predicting to require one more additional quarter of increases to fulfill its financing prerequisites.
The announcement led to a dip in Treasury yields, as the increment wasn't as considerable as previously anticipated. Earlier this week, the U.S. government reduced its borrowing estimate for the year's last quarter to $776 billion, a reduction of $76 billion from the July forecast.
Impact on Treasury Yields
Yields on the 10-year Treasury notes dropped about eight basis points on the day of the announcement, which resulted in a rate of less than 4.8% - a first in approximately two weeks. The Treasury has been escalating auction sizes to compensate for a budget deficit that's growing due to factors such as increased government expenditures, mostly driven by the Federal Reserve's interest rate hikes and quantitative tightening.
The lower than expected borrowing estimate is, in part, a result of income tax payments, deferred due to natural disasters, now starting to flow in from various states.
Reaction of the Market
The forecast that only one additional quarter of increases is necessary mitigated initial concerns. Following the Federal Reserve's decision to maintain steady interest rates, the market responded in contrast to last quarter when a large bond sell-off was triggered by the U.S. government's borrowing forecast of $1.007 trillion for the third quarter.
Scheduled Increases and Future Projections
This time, the Treasury concentrated its most substantial supply boosts in short- and intermediate-dated auctions while the longer-dated debt experienced more moderate rises. The adjustments were an attempt to alleviate the distress aroused in bond markets.
The Treasury detailed plans to raise its auctions with differing amounts and intervals. Joshua Frost, Treasury assistant secretary for financial markets, emphasized the choice to decelerate the growth of longer-dated securities was grounded in anticipated borrowing requisites and potential Treasury securities' demand.
