Is 10-year yield above 3% finally here to stay? U.S. Treasury raises targets for debt sales in second half of 2018

Yesterday the Treasury Department said that it will raise long-term debt issuance to $78 billion this quarter. That would be an increase from the $73 billion in sales last quarter and the third consecutive quarterly increase. The increased sales of Treasury debt are need to fund a rising deficit created by the December tax cuts, the higher spending in recent budget deals, and the Federal Reserve’s efforts to reduce its balance sheet by letting Treasuries roll out of its portfolio as they mature. The deficit totaled $607 billion through the first nine months of the fiscal year that ends September 30, compared with $523 billion from the same period a year earlier. In June the Congressional Budget Office predicted total government spending would exceed revenue by $1 trillion in 2020.

The Treasury will sell $34 billion in three-year notes on August 7 versus $33 billion in June and $31 billion in May. The government will sell $26 billion of 10-year notes on August 8, up from $25 billion last quarter, and $18 billion in 30-year bonds on August 9, up from $17 billion in May.

The yield on the benchmark 10-year Treasury rose above 3% percent for the first time since June 13 in the wake of the refunding announcement. The yield dropped back to 2.98% in today’s trading.

These increases are just the beginning of the Treasury’s plan to increase offer size in coming debt sales back toward the levels of sales during the Great Recession. “We are about halfway through the auction size increases that will be necessary to cover financing needs over the next two or three years,’’ Stephen Stanley, chief economist at Amherst Pierpont Securities wrote in a research note Wednesday. “Eventually, every coupon issue will be at all-time highs, which should come as no surprise given that deficits are projected to be over $1 trillion per year as far as the eye can see.”

Thanks to worries about a possible U.S.-China trade war and its effect on the global economy, the U.S. dollar rose today, helping to trim yields in the Treasury market.