Bank of America has projected that Treasury bond issuance could reach record levels in 2024, driven by unsustainable deficits and elevated interest rates. Here’s a breakdown of the report:
Record-Breaking Treasury Bond Issuance in 2024
Bank of America anticipates that Treasury bond issuance could hit record highs in 2024, and as a result, they have increased their estimate for the supply of 10-year equivalents to approximately $1.34 trillion. This new estimate is $90 billion higher than their previous assessment.
Impact of Rising Interest Rates
The analysts at Bank of America emphasize that higher interest rates will have a significant impact on deficit spending and lead to a larger issuance of US Treasury bonds. This, in turn, creates a spiral effect. The analysts note that rates would need to materialize more than 100 basis points below forwards for costs not to rise substantially as a percentage of GDP. The report underscores the challenging supply outlook, particularly in the context of higher financing costs.
Growth in Deficits and Interest Payments
With the fiscal year 2023 deficit of $1.7 trillion surpassing expectations, Bank of America has adjusted its outlook for the coming years. They predict that between 2024 and 2026, deficits will steadily increase from $1.8 trillion to $2 trillion. Additionally, net interest payments will represent a growing share of GDP, reaching a record 3.5% in 2026.
Challenges in Addressing the Issue
While solutions like tax hikes and spending cuts have been proposed to address the deficit, the report highlights the difficulties lawmakers face in implementing these measures. Instead, it is expected that the Treasury Department will continue to issue debt, expanding the existing $25.8 trillion market.
Expected Increase in Auction Sizes
Bank of America’s analysts anticipate that auction sizes will continue to rise. They expect a repeat of the increase in auction sizes seen at the August refunding, followed by more moderate increases at the February and May refundings. According to their forecasts, this will lead to auction sizes reaching historic highs across various tenors, excluding the 7-year and 20-year bonds.
Impact on Yields
Assuming the Federal Reserve extends quantitative tightening, the increased Treasury issuance is predicted to push the ex-Fed 10-year bond supply to an all-time high of $1.53 trillion in the next year. This additional supply could further pressure yields upward, as recent Treasury bond auctions have already shown signs of weakened demand, leading to rates reaching 16-year highs.
Market Concerns
The supply-demand imbalance in the Treasury bond market has raised concerns among influential market commentators, including Ray Dalio and Bill Gross, who have highlighted the need for higher interest rates to attract buyers.
As the Treasury Department prepares to release its borrowing plans on November 1, the market will be closely monitoring how these projections and challenges unfold.
