The U.S. Treasury Department's normally smooth debt-auction system suffered a minor tremor Wednesday. A bigger disruption may not be far behind if Congress doesn't raise the debt limit soon.
For half an hour, buyers of U.S. four-week bills were left in limbo, unsure whether or not they got the securities they were bidding for. The Treasury delayed release of the results to verify that rules which cap individual bid sizes were followed.
With little room left under the nation's debt ceiling, the Treasury has been issuing less and less shorter-term debt, offering $5 billion this week, the smallest sale of those securities on records dating to 2001. By comparison, the department sold $45 billion of those securities in July.
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"It should be a warning signal to the Treasury to prevent something like this from happening again," said Priya Misra, head of global interest-rate strategy in New York at TD Securities, one of the 22 primary dealers that trade with the Fed. "It's kind of unnecessary risk, I would say, around the auction process" and opens the question of whether there will be more delays, she said.
The Treasury postponed the results to ensure that a rule limiting individual bids to 35 percent of an auction's value wasn't violated, according to a Treasury official who asked not to be identified. Wednesday's $5 billion sale size would have put the bid cap at $1.75 billion.
Negative Rates
Rates on one-month bills have been negative for weeks in secondary-market trading as demand has overwhelmed supply after the Treasury slashed sales of its shortest-maturity securities as it approaches its allowable debt limit.
The Treasury is likely to exhaust measures to stay under the debt ceiling on or about Nov. 5, Secretary Jacob J. Lew said in an Oct. 1 letter to House Speaker John Boehner. At that point, the U.S. won't be able to sell additional debt and may have less than $30 billion of cash. The Treasury's daily expenditures are as high as $60 billion, he said.
Amid the latest debt-ceiling standoff in Washington, Congress has the option of raising the cap or suspending it. That leaves the Treasury little choice but to reduce bill sales as it seeks to preserve auctions of longer-term coupon securities such as 10-year notes and 30-year bonds.
"Protecting the full faith and credit of the United States is the responsibility of the United States Congress," Lew wrote in his letter. "There is no way to predict the catastrophic damage that default would have on our economy and global financial markets."
Goldman Glitch
Auction glitches are infrequent but not unheard of. In September 2013, a malfunction with the government's online order system prevented Goldman Sachs Group Inc. from participating in an auction of three-month U.S. Treasuries, a person with direct knowledge of the matter said at the time.
The order system, known as TAAPS, worked properly in Wednesday's auction, a Treasury official said.
In December 2013, sales of three- and six-month bills were rescheduled for the following day because of an error that occurred during a test of the auction system, according to the Treasury.
"Hopefully, whatever glitch there was, they manage to resolve it before the coupon auctions, because that would be a much a bigger deal," Misra said.
The Treasury is scheduled to release details about longer-term debt sales, such as 10- and 30-year debt, at its next quarterly refunding announcement Nov. 4.
–With assistance from Liz Capo McCormick in New York.
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