Treasury to Increase Duration?
Bloomberg carries an interesting analysis of the looming shift of US Treasury issuance for 2010. “After selling $1.9 trillion of short-term securities to finance President Barack Obama’s efforts to end the worst recession since the 1930s, the Treasury plans to lengthen the average due date of its outstanding debt to 72 months from a 26- year low of 49 months. That may mean boosting sales of 10- and 30-year bonds by 40 percent over the next year to $600 billion…”.
As everyone knows, this week ends the Federal Reserve’s $300 billion QE program of monetizing the US government debt by purchasing US Treasury securities. (BTW, Congress has to increase the debt limit very soon and this will be jacking newsflow on this subject.) The US Treasury is going to auction this week $123 billion in new note debt this week alone. After the Fed stops their MBS QE program at the end of Q1, we’ll see a how interest rates respond without the Fed distorting it.
The point is that the US Treasury is going to increase duration as the same time that the Fed is dropping their QE programs. This should translate into a steeper yield curve and higher cost of funding the US government…….which means more borrowing to fund the deficit which means more issuance which means more borrowing to………