Barclays interest rate strategists anticipate that, moving into next year, the U.S. Treasury will continue to increase the issuance size of Treasury Inflation-Protected Securities (TIPS, Financial), despite arguments against this action. The Treasury is set to announce the auction sizes for notes and bonds covering November to January shortly, having previously indicated that only TIPS might see expanded issuance.
Strategists Michael Pond and Jonathan Hill highlighted their focus on the issuance size of the new 10-year TIPS expected in January. Both strategists, along with most primary dealers, predict an increase in issuance size to $20 billion. In the last issuance this past July, the Treasury issued $19 billion of 10-year TIPS.
This announcement is expected to set the tone for the remainder of the year. If the TIPS issuance continues to hit record levels, it would not come as a surprise to Pond and Hill. They suggest a more prudent approach might be to pause further expansions and maintain the new January issuance at $19 billion, only increasing once the nominal coupon issuance expands.
According to their analysis, there is little evidence of growing structural demand for TIPS, nor does increased issuance seem to enhance liquidity. This situation raises the relative borrowing costs.
