The U.S. Department of the Treasury significantly raised its net borrowing estimate for the third quarter of this year to a record $1 trillion, a 36.4% increase from the initial $733 billion projection made in early May. The revision, announced this Monday, underscores a concerning trend of deepening fiscal deficits.
Media reports emphasized that the adjusted borrowing expectation marks a historic high for this period.
This uptick in the projected figure is partly due to the Treasury's anticipated end-of-quarter cash balance, which has been revised from $600 billion to $650 billion, significantly higher than the previous estimate. As of now, the Treasury General Account (TGA) contains roughly $552 billion in cash.
Prior to this announcement by the Treasury, traders had predicted a large-scale issuance of long-term U.S. bonds, beginning this week and possibly extending into next year, driven by soaring interest rates following the Federal Reserve's persistent tightening and the government's widening fiscal deficit.
It's generally expected among traders that this Wednesday, the Treasury will announce an increase in the size of its long-term bond auction for the quarter from the previous quarter's $960 billion to $1.02 trillion.
The specific debt issuance plan is likely as follows: $42 billion in 3-year bonds on August 8th, $37 billion in 10-year bonds on August 9th, and $23 billion in 30-year bonds on August 10th.
If the Treasury follows these expectations, it will mark the first time since early 2021 that the quarterly long-term bond issuance has been increased. Although these quarterly bond issuance figures remain lower than the peak levels reached during the COVID-19 pandemic, they are significantly higher than pre-pandemic levels.
It's been noted in the media that the public's borrowing needs have risen, in part due to the Federal Reserve's rate hikes and subsequent increase in Treasury yields. Additionally, the Fed is reducing its bond holdings, leading to greater price volatility for Treasury bond issuance. An expansion in issuance doesn't directly lead to a drop in bond prices or a rise in yields, but it could exacerbate short-term bond volatility during times of waning bank interest in market-making.
Mark Cabana, head of U.S. rates strategy at Bank of America, has expressed concern about the flood of upcoming bond supply and the alarming data regarding the government's deficit.
Traders are also forecasting that on Wednesday, the Treasury's debt management office is likely to increase the regular issuance size for nearly all bond tenures, except possibly for the less in-demand 7-year and 20-year bonds, which might not see an increase or only a minor one. Traders will also keep an eye on any new developments with the bond repurchase program.
When the Treasury maintained its long-term bond issuance size for the last quarter in May, it surprised the market by announcing plans to begin repurchasing existing securities from 2024. This would be the Treasury's first regular repurchase program in approximately twenty years.
The Treasury stated that the repurchase program is aimed at enhancing the liquidity of the U.S. Treasury market and reducing the volatility of the Treasury's cash balance and bond issuance. However, some comments suggested that despite the Treasury's claim that the buybacks aren't meant to significantly alter the distribution of bond durations, the market will interpret the move as the Treasury's version of Quantitative Easing (QE), at least until the Fed joins in with its own QE program due to a market crash.
