By David Randall

NEW YORK (Reuters), – On Monday the U.S. Treasury Department announced its funding plan. It is likely to lower the auction size. This announcement marks the beginning of lowering government debt supply.

Wall Street is anticipating this move. According to NatWest, there will be a $800billion reduction in nominal auction size in 2022 fiscal year as compared to 2021 fiscal year. According to estimates by NatWest, the majority of these cuts will occur in securities that have a shorter duration than seven years. This includes a cut of $2 billion each month in Treasury bonds, which can be held for 2, 3, or 5 years. The bank also expects $3 billion per monthly cuts in Treasuries of 7, 10 and twenty-year terms.

“After ramping-up coupon issuance for pandemic expenditure, it’s now time that Treasury reduces issuance sizes commensurately with more normal deficits,” explained Meghan Swiber of Bank of America Global Research, a rates strategist.

The Treasury’s plans to reduce bond supply may increase the demand for short-duration bonds, and the yield curve will steepen, but the decrease in debt issuance could be temporary given that Congress is likely to pass a $1 trillion infrastructure bill by the Democrats and a $1.75 billion bill to address climate initiatives. Scott Kimball, who co-heads U.S. fixed income, at BMO Asset Management, stated that the Treasury’s anticipated plans to lower bond stock will boost the demand for these shorter-duration bonds, [L1N2RO0ZK]

According to him, “From an issue standpoint this is most likely the calm prior the storm.”

Gennadiy Gilberg, Senior Rates Strategist at TD Securities said that the Treasury Department’s funding plans would likely be affected by the unresolved issue of the debt limit. This limits the U.S. government’s borrowing limit.

President Joe Biden signed legislation https://www.reuters.com/world/us/biden-signs-bill-raising-us-debt-limit-averting-default-2021-10-15 to increase the limit by $480 billion in mid-October, a short-term measure that pushed back the date by which the federal government is expected to exhaust its borrowing power to Dec. 3.

The Treasury, “despite the increase in the debt ceiling short term, is expected to be severely constrained” by the ceiling. Goldberg said that while we expect the bill supply to stay limited for now, it will likely increase once the ceiling is lifted or suspended.”

The Treasury Department will announce its overall refunding plans on Monday and release details such as the size of next month’s auctions on Wednesday, the same day that the Federal Reserve is expected to announce its plans to taper its emergency-level support of the economy.