The US Treasury Department announced on Monday that it has lowered its borrowing forecast for the fourth quarter, providing some relief to the bond markets that have been overwhelmed by an excess of new debt. The revised estimate states that the Treasury will borrow $776 billion in the final quarter of the year, which is $76 billion less than the previous forecast made in July. This decrease is attributed to increased revenue estimates, with the Treasury expecting a rise in income tax payments from California and other states that were postponed due to natural disasters.
The news of the reduced borrowing forecast has caused a slight drop in Treasury yields, particularly for longer-dated securities. The benchmark 10-year yield is currently at 4.88%. This decrease in yields is a welcome development for investors who have been concerned about the mounting bond supply and widening budget deficits. The Treasury had to rebuild its cash balance earlier this year following a debt ceiling standoff in Congress, which put pressure on yields.
The announcement of the revised borrowing forecast has garnered significant attention in the market. Thomas Simons, a money market economist at Jeffries in New York, noted that interest in the projections has been higher than usual. While the borrowing estimate is not at the higher end of expectations, it has still provided some relief to the market.
Investors are now eagerly awaiting the Treasury’s quarterly refunding statement, which will provide details on the maturities that will see an increase as part of the department’s efforts to handle record borrowing levels. Auction sizes have been growing across various maturities, and recent sales have been described as sloppy by some dealers. Last week’s sale of $52 billion of 5-year Treasury notes, for example, had the lowest-bid-cover ratio in over a year and yielded slightly higher than expected. This sale was attributed to the subsequent increase in yields across government bond markets.
Deutsche Bank’s U.S. rates strategist, Steven Zeng, believes that the reduced borrowing estimates are unlikely to push down the term premium on longer-dated securities. He also added that the term premium might still have room to increase further depending on the Treasury’s announcements during Wednesday’s refunding statement. Zeng warned that there may be surprises in store if the Treasury opts for more aggressive long-end issuance.
The total outstanding U.S. debt has reached $33.7 trillion, up from $31.5 trillion in June. This surge in debt levels has been driven by record U.S. deficits resulting from the pandemic. While the reduced borrowing estimate for the fourth quarter is a positive development, it is crucial to note that it would still be a record figure for any October-December period.
The Treasury has also projected borrowing $816 billion in the first quarter of 2024, which would be a record during that period. However, it acknowledged that there have been instances where borrowings and cash balance drawdowns have been higher. The Treasury expects to have a high cash balance of $750 billion by the end of December and the end of March.
In the previous quarter, the Treasury borrowed $1.01 trillion and ended the period with a cash balance of $657 billion, marking the largest net debt issuance for a third quarter. While this amount is significantly lower than the almost $3 trillion the Treasury borrowed in the second quarter of 2020 during the COVID-related business closures, it still underscores the immense borrowing needs of the U.S. government.
The market now awaits the Treasury’s refunding statement tomorrow for further insights into its borrowing plans and the potential impact on the bond markets.
