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PRIMER - US Treasury Q2 Quarterly Refunding Announcement is due at 13:30BST/08:30EDT

The upcoming US Treasury Q2 Quarterly Refunding Announcement, expected to maintain current auction sizes, signals stability but raises concerns about future funding pressures.

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PRIMER - US Treasury Q2 Quarterly Refunding Announcement is due at 13:30BST/08:30EDT

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  • Analysts expect the Q2 QRA will leave nominal coupon, FRN and TIPS auction sizes unchanged (prev. 2yr USD 69bln, 3yr USD 58bln, 5yr USD 70bln, 7yr USD 44bln, 10yr USD 42bln/39bln, 20yr USD 16bln/13bln, 30yr USD 25bln/22bln, FRN USD 28bln/30bln; TIPS: 30yr USD 9bln, 10yr USD 19bln, 5yr USD 26bln), placing the focus on any shift in forward guidance.
  • In its Q1 announcement, the Treasury said it expected to maintain nominal coupon and FRN auction sizes “for at least the next several quarters”. Analysts will watch whether the Treasury softens that language to something closer to ‘the next few quarters’, which could suggest that coupon increases are moving nearer as the funding gap widens into next year.
  • Financing estimates released earlier this week already point to heavier underlying needs, with Q2 borrowing now seen at USD 189bln (prev. USD 109bln) and Q3 at USD 671bln, alongside a USD 900bln end-June cash balance (prev. USD 900bln) and USD 950bln end-September cash balance.
  • Traders will also look to the press conference after the announcement for any signs on the likely composition of future increases, particularly whether supply pressure is directed towards 5yr/7yr maturities, rather than the long end.
  • Buybacks will also be in focus after Q1 guidance for up to USD 38bln of liquidity-support purchases, and up to USD 75bln in the 1-month to 2-year bucket, with any expansion of counterparties or operational changes relevant for market liquidity.
  • Longer-term, potential changes to Fed balance sheet policy remain a consideration; Fed Chair nominee Warsh has signalled a preference for a smaller balance sheet and reduced holdings of longer-dated Treasuries, which could reduce structural demand for duration and eventually require adjustments to issuance strategy, analysts say.
Context

Analysts are particularly focused on any language shift in forward guidance, which could foreshadow impending coupon increases as borrowing needs escalate, impacting market liquidity and influencing interest rates across the curve.

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