(Bloomberg) — The U.S. Treasury has been planning for years how to deal with the funding gap set to open up when the Federal Reserve begins unwinding its $2.5 trillion hoard of the government’s debt.
Now there’s a new wrinkle to prepare for, as the latest deal to extend the nation’s debt limit complicates matters for Treasury Secretary Steven Mnuchin just as the Fed is expected to unveil the start of its balance-sheet reduction.
With the debt-cap suspension expiring Dec. 8, there’s a growing sense among investors and analysts that Treasury will have to slow or hold off on the inevitable — increasing note and bond sales to deal with the shift in Fed policy and rising federal deficits. Most strategists had predicted that long-term tilt toward more coupon issuance would start in November, so a delay may provide a boost for bond bulls betting yields can stay near historic lows.
“The debt-limit issue will in the near-term affect what Treasury does with coupon issuance,” said Gene Tannuzzo, a money manager at Columbia Threadneedle, which oversees $473 billion. “At the end of the day, Treasury will have to do a lot more coupon sales. On the margin, for now, if there is less coupon issuance it is a modestly positive technical” for Treasuries.
Just how exactly Treasury will respond to the Fed’s tapering is one of the great unknowns facing investors. The mix of maturities it decides on has far-reaching implications for the world’s biggest bond market, with the potential to alter the shape of the yield curve for years to come.
A Treasury spokeswomen, Marisol Garibay, declined to comment.
That is, IF the Fed tapers their balance sheet.
The Fed is likely to cap reinvestments of Treasuries and Agency MBS rather than outright sell them out of their portfolio. Agency MBS gradually bleed off due to mortgage refinancings and Treasuries eventually mature.
If anyone is worried about the budget gap, imagine what it will look like with Bernie Care (Medicare for all)!
Since Medicare is already growing at an explosive rate.