The U.S. Treasury sold $50 billion of four-week bills, kicking off what's forecast to be the largest month of short-term debt sales in seven years, after issuance shrank before the deadline to reach a compromise on the U.S. debt ceiling.
The $225 billion of bills expected to be sold this month is the most since the Treasury stepped up issuance during the financial crisis to help bail out banks as demand for the safest assets surged. Tuesday's sale is the biggest since December 2014.
The $50 billion of four-week notes sold at a rate of 0.07 percent, as investors submitted bids amounting to 3.46 times the amount of debt issued, a measure known as the bid-to-cover ratio. The supply comes as regulations designed to protect money-market mutual fund investors from unforeseen losses are pushing more asset managers into U.S. government securities.
“It's indicative of the market's demand for bills after two months of pretty steep pay-downs,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, one of the 22 primary dealers that are obligated to bid U.S. debt sales. “One of the reasons it went so well was it was presenting some decent yield.”
Last week the White House and top lawmakers from both parties reached a deal to avoid a default after Nov. 3, the date Treasury Secretary Jacob J. Lew had expected the U.S. would reach its debt limit. The accord will give the government new borrowing capacity until March 2017 and includes a two-year agreement on spending, aides from both parties said.
Excluding the Oct. 20 bill offering, when investor concern about the debt ceiling pushed the yield to 0.12 percent, the rate at today's sale was the highest for the securities since February 2014, amid debt-limit talks going on at that time. The U.S. sold $5 billion of four-week securities on Oct. 27 at a rate of 0.01 percent. Offerings averaged $36 billion for the first eight months of the year.
The bill market shrank 4.6 percent, to $1.36 trillion, in September, curtailing the amount of the shortest-term Treasury debt outstanding to the smallest since August 2008.
Citing the Treasury's forecasts of $344 billion in net borrowing in the fourth quarter and $165 billion in the first three months of 2016, JPMorgan said in a note to clients published Tuesday that the U.S. will increase the amount of bills outstanding by $225 billion this month, the most since November 2008.
The impact of the debt ceiling on issuance, with the sudden withdrawal and return of supply, may add to volatility in the bill market as this month's deluge of sales continues.
“We're going to see a little more gyration when the supply hits the market,” Simons said. “Even though there is strong demand for it, it all coming at once can cause some minor digestive issues.”
–With assistance from Liz Capo McCormick in New York.
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