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The U.S. Treasury Department announced on Monday that it anticipates borrowing $776 billion in the fourth quarter, reducing its forecast by $76 billion from July. This decision is based on increased revenue estimates, providing some relief to bond markets that have been grappling with an abundance of new debt.
A U.S. Treasury official stated that revenue is expected to rise in the October-December period, partially due to the flow of income tax payments from California and other states that had been deferred due to natural disasters.
These projections led to a slight decline in U.S. Treasury debt yields, with the benchmark 10-year yield standing at 4.88%.
Over recent months, Treasury yields, particularly on longer-dated securities, had surged due to expanding bond supply as budget deficits widened, and the Treasury worked to rebuild its cash balance, which had been depleted during a debt ceiling standoff in Congress earlier in the year.
Thomas Simons, a money market economist at Jefferies in New York, noted that there was a heightened interest in today’s borrowing projections, and the reduced estimate brought some relief to the market since it didn’t reach the upper end of expectations.
Investors are now eagerly awaiting the Treasury’s quarterly refunding statement on Wednesday to ascertain which maturities will be increased as the department continues to pursue record borrowing levels.
Notably, auction sizes have been growing across various maturities, and recent sales have been characterized as “sloppy” by some dealers. Last week’s sale of $52 billion of 5-year Treasury notes, the largest ever outside the COVID-19 issuance surge from 2020 through early 2022, had the lowest bid-cover ratio in over a year. It also concluded at a slightly higher yield than anticipated by the “when-issued” market, with this sale later being cited as a factor driving up yields in government bond markets.
While the reduced borrowing estimates are expected to have a limited impact on longer-dated securities, it will largely depend on the composition of Wednesday’s refunding announcement. The “term premium” on longer-dated securities may not experience significant downward pressure, as some analysts believe.
The total outstanding U.S. debt has increased to $33.7 trillion, up from $31.5 trillion in June and a significant surge from $23.2 trillion in early 2020 before the onset of the pandemic, which led to record U.S. deficits.
The reduced $776 billion borrowing estimate, although lower, would still establish a record for any October-December period, surpassing the $689 billion borrowed in the same quarter of 2021, driven by substantial COVID-19 relief expenditures.
The Treasury also estimates a borrowing of $816 billion in the first quarter of 2024, setting a record for that period. However, it acknowledges that borrowings, coupled with cash balance drawdowns, have occasionally been higher for this period. The Treasury anticipates a cash balance of $750 billion for both the end of December and the end of March.
In the third quarter of 2023, the Treasury reported borrowing $1.01 trillion and ending the period with a cash balance of $657 billion. While this marked the largest net debt issuance during a third quarter, it pales in comparison to the nearly $3 trillion borrowed in the second quarter of 2020 when government spending increased due to COVID-related business closures.
