Friday, November 18, 2011

How Will Deficit Super Committee Impact Next Week's $99 Billion Treasury Note Auctions?

On November 21, 22 , and 23 the U.S. Treasury is auctioning $99 billion of notes to fund the U.S. debt. A debt auction on the day (or days) when uncertainty about the Committee's deliberations will be at its height strikes me as particularly inopportune timing.

The low expectation surrounding  the outcome of the Super Committee could limit the reaction of the bond market to a stalemate. However, there is certainly the potential that a failure to come to an agreement will  drive down the price of U.S notes and bonds. The outcome Super Committee negotiations may have its biggest impact on the last of the 3 auctions on the 23rd, the day after the deadline and also the auction with notes featuring the longest maturities (7 years).

The price activity in the bond market has a direct impact on bidding at the Treasury auctions, and the Treasury auction results have a big immediate impact on the bond market. However, the fluctuations in the bond market do not impact the U.S. deficit (with the exception of the small portion of the debt that is funded with TIPs bonds). However, the prices reached at the bond auctions lock in the rate the Treasury has to pay in interest rates. Thus, the results of the Treasury auctions next week will have an impact on the deficit for the next few years. Each 0.1% move in the interest rate required to auction off the notes next week changes the annual interest cost by $100 million. So the results of the Super Committee's deliberations will have an immediate impact on the size of the deficit in 2011 based on the reaction of the buyers participating in the Treasury auction.

1 comment:

  1. Boy, did I get this one wrong. Today's auction (11/22/11) set a record low yield for the 5 year Treasury note. Obviously, U.S. Treasury buyers are not the least bit fazed by the dysfunctional Congress. Seems like at least for now buyers are satisfied with kicking the can down the road. Also, President Obama hawkish statements on ard to sequestration may be helping the bond market