The Treasury, signaling that its debt issuance has likely peaked, on Friday asked its primary bond dealers for advice on how best to reduce coupon sizes as the government's fiscal outlook improves.
The Treasury put the question to dealers in a survey ahead of an April 30 meeting that is part of its quarterly debt refunding effort.
In recent months the Treasury has shifted to longer-dated coupon notes and bonds as government spending to fight the recession has increased and tax revenues have dwindled. But as the economy recovers and budget deficits shrink, that need could abate.
The Treasury is due on May 5 to announce quarterly auctions of 3-year, 10-year and 30-year debt to refund maturing securities.
"Treasury indicated at the February refunding that debt managers are contemplating a reduction in coupons sizes as the fiscal outlook improves," it said in a questionnaire which it asked dealers to fill out before the meeting, adding:
"How should Treasury accomplish such a reduction?"
The survey also asks dealers for their views on increasing the frequency of inflation indexed notes known as Treasury Inflation Protected Securities. It sought their considerations in a plan Treasury is contemplating to add a second auction of reopened 10-year TIPS each quarter, asking:
"What other changes regarding TIPS issuance should Treasury be evaluating?"
In addition, the Treasury asked dealers to discuss how new Securities and Exchange Commission requirements for money market funds might impact the demand for Treasury securities.
The so-called Rule 2a-7 changes were put in place to require money market funds to maintain more liquidity after a key fund "broke the buck" when its net asset value per share fell below $1 at the height of the financial crisis in 2008, triggering a temporary Treasury guarantee program.
Among provisions in the rules are a reduction in weighted average maturity of money market portfolios to 60 days from 90 and a requirement they invest no more than 3 percent of assets in second-tier securities compared to 5 percent previously.
These provisions could lead to more demand for Treasury securities by money market funds as they seek to increase their liquidity and safety.
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