US Government to Reduce Treasury Issuance Volume for the First Time in 5 Years... Response to Fed Tapering?

US Treasury: "Need for Government Fiscal Spending Decreases... Possible Announcement of Reduced Treasury Issuance in November"
Reduction in Treasury Issuance Volume First Time in 5 Years... May Help Defend Treasuries Weakness Due to Fed Tapering

U.S. Treasury Secretary Janet Yellen (left) and Federal Reserve Chairman Jerome Powell
[Photo by AFP Reuters Yonhap News]

[Asia Economy Reporter Park Byung-hee] Major foreign media reported on the 4th (local time) that the U.S. government plans to reduce the amount of Treasury bond issuance for the first time in five years.

The U.S. Treasury Department stated that the amount of Treasury bond issuance in the upcoming fourth quarter will remain unchanged at $126 billion, but it may announce a plan to reduce the issuance as early as November. The Treasury explained that as the need for fiscal spending to stimulate the economy decreases, there may be room to reduce the scale of Treasury bond issuance. This means that the need for government fiscal spending will decrease as the U.S. economy recovers. If the Treasury reduces the scale of Treasury bond issuance, it will be the first reduction in five years.

The possibility of the Treasury reducing the amount of Treasury bond issuance is attracting attention as it is linked to the expectation that the Federal Reserve (Fed), the U.S. central bank, is approaching the timing of tapering its quantitative easing.

The Fed announced last week at the Federal Open Market Committee (FOMC) meeting that it discussed tapering. The Fed is currently purchasing $80 billion worth of Treasury bonds and $40 billion worth of mortgage-backed securities monthly through quantitative easing.

If the Fed reduces the amount of Treasury bond purchases through quantitative easing, U.S. Treasury bond prices will inevitably fall. However, if the Treasury reduces the issuance amount in a timely manner, it can reduce the risk of price decline.

Mark Cabana, investment strategist at Bank of America (BOA), said, "It seems that part of quantitative easing is being transferred from Fed Chair Jerome Powell to Treasury Secretary Janet Yellen."

The fact that the U.S. fiscal deficit continues to increase is also a burden for the Treasury. It is forecasted that the U.S. federal government's fiscal deficit for the 2021 fiscal year (October 2020 to September 2021) will exceed $3 trillion again, following the 2020 fiscal year (October 2019 to September 2020). According to a report released by the Treasury last month, the cumulative federal government fiscal deficit for the first nine months of this fiscal year reached $2.238 trillion.

As COVID-19 spread, the U.S. fiscal deficit reached a record high of $3.129 trillion in the 2020 fiscal year. This was about three times the size compared to the 2019 fiscal year. The government loosened fiscal policy on a large scale to respond to COVID-19.

The scale of U.S. Treasury bond issuance has steadily increased even before the COVID-19 pandemic began. This was because the government continued to increase fiscal spending to stimulate the economy. During the Donald Trump administration, tax cuts also expanded the U.S. fiscal deficit continuously.

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