Trump Lifts Debt Sales to Near-Recession Levels as Economy Booms
(Bloomberg) -- President Donald Trump is boosting long-term U.S. debt sales to the highest since 2010, matching the pace when the country was digging itself out of the worst recession since World War II, even as the economy is booming.
To cope with the fiscal expansion driven in part by Trump’s tax cuts and spending measures approved by Congress, the Treasury Department said Wednesday that it will raise long-term debt issuance to $78 billion this quarter. It is also launching a new two-month bill and will lean more heavily on maturities out to five years.
Trump’s policies are further weighing on the fiscal outlook that he inherited from his predecessor, Barack Obama. Treasury has also highlighted the need to sell debt as the Federal Reserve allows maturing securities on its $4.3 trillion balance sheet to roll off gradually.
In its quarterly refunding announcement on Wednesday, Treasury said it boosted the auction sizes of coupon-bearing and floating-rate debt from $73 billion the previous quarter. It was the third consecutive quarterly increase, as Trump’s fiscal policies widen the nation’s budget deficit.
The Treasury will sell $34 billion in three-year notes on Aug. 7, compared with $33 billion last month and $31 billion in May. The government increased to $26 billion the sale of 10-year notes to be auctioned on Aug. 8, from $25 billion last quarter, and the 30-year bonds to be sold on Aug. 9 to $18 billion from $17 billion in May, Treasury said. The sales will raise new cash of $39.8 billion.
The benchmark 10-year Treasury yield rose above 3 percent for the first time since June 13 in the wake of the refunding announcement. The yield curve from 5 years to 30 years steepened, with the spread rising to over 26 basis points earlier Wednesday, before retreating to about 25 basis points.
The deficit totaled $607 billion through the first nine months of the fiscal year that ends Sept. 30, compared with $523 billion from the same period a year earlier. The Congressional Budget Office in late June predicted total government spending would exceed revenue by $1 trillion in 2020.
Still, Treasury Secretary Steven Mnuchin has said that a stronger economy will boost government revenue and help shrink the budget deficit. The U.S. economy is “well on the path” for four or five years of sustained annual growth of 3 percent, he said on Sunday.
Treasury officials Wednesday said that flattening of the yield curve -- with the gap between two- and 10-year Treasury yields touching last month its narrowest since 2007 -- wasn’t dictating their choices. Investors and some Federal Reserve officials have expressed concern that the curve may invert –- which has historically been a harbinger of recession.
“Being the U.S. government, being one of the largest sovereign debt markets in the world, obviously we need to continue to issue debt and meet our financing needs no matter what the shape of the curve is -- whether the curve is steep or flat, or interest rates are rising or falling,” Deputy Assistant Treasury Secretary Clay Berry told reporters in Washington. “We really don’t have the flexibility or the ability to time the market, if you will, since we are kind of a consistent, large issuer over time, no matter what the interest rate environment.”
The Treasury is in an overall process of lifting coupon auction sizes back toward their historical maximums, which occurred in the years just after the financial crisis, says Stephen Stanley, chief economist at Amherst Pierpont Securities LLC.
“We are about halfway through the auction size increases that will be necessary to cover financing needs over the next two or three years,’’ Stanley wrote in a note Wednesday. “Eventually, every coupon issue will be at all-time highs, which should come as no surprise given that deficits are projected to be over $1 trillion per year as far as the eye can see. ‘’
The department said Wednesday it will start sales of a new two-month bill in October. This security will settle on Tuesdays rather than Thursdays.
The Treasury also said it plans to boost auction sizes of all other maturities over the coming quarter. Treasury will boost the size of its two-, three- and five-year notes by $1 billion per month over the quarter, while increasing the floating two-year auction by $1 billion in August. The department will raise the size of its seven-, 10- and 30-year notes by $1 billion in August, holding auction sizes at that level through October. The changes will result in an additional $30 billion of new issuance.
The department again left unchanged the size of inflation-linked securities, or TIPS. Treasury is studying whether to introduce a second new five-year TIPS to its auction calendar. The department is still analyzing potential additions and expects to make an announcement in November.
Given seasonal patterns, “bill supply is anticipated to gradually increase,” Treasury said. “This increased bill supply will include the launch of the new benchmark 2-month bill in October.” The department said it will meet any unexpected change in financing needs with increased bill sales.
The Treasury’s borrowing needs in the second half of the year will be the most since the financial crisis a decade ago, with the Treasury expecting to issue $769 billion in net marketable debt, the department said Monday. That compares with $1.1 trillion in July-December 2008, when America was in the midst of its worst recession in generations.
Tax cuts, higher government spending and an aging population are expected to push the federal budget shortfall to $804 billion in the current fiscal year, according to the Congressional Budget Office.
Mnuchin has said repeatedly that corporate and individual tax cuts will fuel faster economic growth that will boost tax revenue and shrink the deficit. Gross domestic product accelerated in the second quarter to the fastest pace since 2014, though many economists say the expansion will moderate in coming quarters and years.
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