The US Treasury Department is expected to announce an increase in auction sizes on February 13th. 

This is due to the rising spending requirements from social security and interest costs, which have contributed to a budget deficit. 

Analysts predict that the Treasury will expand auction sizes for most maturities, except for the 20-year bond, which typically sees weaker demand. 

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• Treasury expected to continue expanding auction sizes in February, refunding to meet higher spending needs.

• Further increases are likely for most maturities except 20-year bonds, with 30-year issuance a wildcard.

• Fed balance sheet reduction tapering in 2023 could gradually ease the Treasury financing burden in the second half of the year.

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Treasury Auction Sizes Poised for Expansion to Cover Rising Costs

The magnitude of increases is expected to match the last round in November. 

However, it remains uncertain whether the 30-year supply will continue rising.

There was weak demand for 30-year bonds in late 2022 as longer-term yields spiked on inflation and supply concerns. 

However, with yields retreating recently, it seems likely that further 30-year issuance will be necessary to meet financing needs. 

Short-dated Treasury bill supply will also likely keep climbing, even beyond the Treasury Borrowing Advisory Committee’s recommendation of a 15-20% share of total debt, as greater bill issuance provides flexibility when worries over long-bond demand resurface.

The Fed’s quantitative tightening program should begin easing in 2023, reducing pressure on the Treasury’s financing burden. 

As the central bank’s balance sheet falls from its $9 trillion peak, total financing needs may drop, even though deficits stay elevated. 

Treasury may also unveil plans for a bond buyback program, which will involve acquiring fewer liquid issues and ramping up the issuance of highly liquid securities to improve market functioning.

For bond investors, expanded auction sizes signal more supply pressure in 2023. 

However, with the Fed potentially slowing QT, financing strains could gradually ease in the year’s second half. 

The Treasury’s quarterly budget update on February 13th will provide critical clues on how much borrowing must rise soon.

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