The Treasury Department revealed on Monday that it expects to borrow $1.007 trillion in the third quarter, or $274 billion more than estimated in May.
Some of the issues facing Treasury ahead of year-end include the prospects of slowing economic growth plus the impacts of the Federal Reserve’s ongoing rate hikes and its shrinking balance sheet. The third-quarter borrowing estimate, which assumes an end-of-September cash balance of $650 billion, has gone up partly because of projections for lower receipts and higher outlays, Treasury officials said. Treasury’s refunding announcement is expected at 8:30 a.m. Eastern time on Wednesday.
The increase comes at a time when the country’s borrowing needs are running far above what’s being taken in, and the national deficit is hovering around $1.39 trillion. Ever since June, when President Biden signed into law a bill to lift the nation’s debt limit and avoid a government default, Treasury has been relying on the T-bill market to replenish its general account. Now, according to strategists at TD Securities, Treasury is preparing to boost the auction sizes of coupons beyond T-bills, via Wednesday’s August refunding announcement — which could then be followed by further increases in bill issuance in coming quarters.
“The risks to budget deficits are certainly to the upside over the next year, largely because of a likely slowdown in economic growth, higher financing costs due to higher rates, and the low likelihood of deficit reductions heading into an election year,” said Gennadiy Goldberg, head of U.S. rates strategy for TD Securities. “We now expect Treasury to continue auction size increases for the next three quarters.”
In a note released last week, Goldberg and U.S. rates strategist Molly McGown said Treasury’s refunding announcement this Wednesday “is likely to bring the first increases to coupon auction sizes since 2020.” They said they expect Treasury “to increase 2-7y sizes by $1 billion per month and 10-30y new issues and reopenings by $1 billion each.”
Monday’s revised $1.007 trillion third-quarter estimate is the largest ever for the July-September quarter, Treasury officials said. However, it falls short of the almost $3 trillion borrowing estimate that Treasury gave in May 2020 after the U.S. onset of the COVID-19 pandemic for the April-June quarter of that year.
On Monday, Treasury officials said the department also expects to borrow $852 billion in privately-held net marketable debt during the fourth quarter, assuming an end-of-December cash balance of $750 billion.
Treasury yields ended the New York session mostly lower on Monday, as traders eyed a busy week of data that culminates with Friday’s nonfarm payrolls report for July. For the month, the 30-year yield
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climbed 16.3 basis points, its largest monthly gain since May, according to 3 p.m. Eastern time figures from Dow Jones Market Data.
In May, the Treasury said it had expected to borrow $733 billion in the third quarter.
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