NEW YORK, Feb 4 (Reuters) - The U.S. Treasury said on Wednesday it does not anticipate increasing auction sizes for notes and bonds for at least the next several quarters, in line with market expectations, as it announced a $125 billion refunding from February to April 2026.
The refunding aims to raise new cash of $34.8 billion from private investors for the quarter.
But the minutes of the meeting on Tuesday of the Treasury Borrowing Advisory Committee (TBAC), which were released on Wednesday, caught the market's attention because they provided estimates from primary dealers of a $1.1 trillion shortfall for the 2027-2028 fiscal year, as well as expectations of the timing of the next increases in auction sizes for notes and bonds.
The Treasury said it continues to evaluate future increases to auction sizes for nominal coupons - Treasury notes and bonds that pay interest - and floating rate issues. The Treasury added that it will focus on "trends in structural demand" and the potential costs and risks associated with different issuance strategies.
In a statement, the Treasury also said it will sell $58 billion in U.S. three-year notes, $42 billion in 10-year notes, and $25 billion in 30-year bonds next week. Those figures matched the auction sizes for the same securities announced at the November refunding.
"The refunding broadly met expectations. No changes to nominal coupon sizes or floating rate notes and really no change to forward guidance," said Zachary Griffiths, head of investment grade and macro strategy at CreditSights in Charlotte, North Carolina.
The minutes also showed that dealers estimated that at those current issuance sizes, the Treasury is slightly overfunded for the 2026 fiscal year, as they reduced their aggregate privately-held marketable borrowing estimate by $258 billion for the 2026-2028 fiscal years.
Overall, dealers expect that nominal coupon auction sizes might next increase in late 2026 or early next year.
"The TBAC made a comment that it could be beneficial to begin increasing nominal coupon auction sizes earlier, at a more gradual pace, and perhaps that's causing a small market reaction," Griffiths said.
The yield curve steepened after the Treasury refunding announcement, with market participants pointing to the $1.1 trillion deficit shortfall cited in the TBAC minutes and expectations of an earlier-than-expected time frame for the increase in auction sizes for coupon issuance.
The spread between U.S. two-year and 10-year yields rose to 70.8 basis points (bps) after the refunding statement, from 69.3 bps late on Tuesday.
A steeper curve can signal concerns about rising fiscal deficits, prompting investors to avoid the long end of the curve.
Reporting by Gertrude Chavez-Dreyfuss; Editing by Louise Heavens and Paul Simao
