Trump’s Debt Binge Puts Treasury Auctions on Path to New Highs
(Bloomberg) -- The Treasury Department is expected to hold its quarterly note and bond sales at record levels for the third straight time as Washington’s latest budget deal shows that the U.S.’s debt binge will continue.
President Donald Trump once said he would eliminate the national debt, but now he’s set to approve a budget that will help usher in trillion-dollar annual deficits. In part because of that, Wall Street securities firms predict that a boost in Treasury issuance may be coming in a year’s time.
Bond dealers see the status quo prevailing at Wednesday’s quarterly refunding announcement. Forecasts are coalescing around the view that the Treasury will keep auction sizes of 3-, 10- and 30-year debt unchanged at a record total of $84 billion, in sales scheduled from Aug. 6-8. To put it in perspective, the tally was $62 billion at the time of the 2016 U.S. election.
But there’s general agreement among analysts that the plateau in issuance can last only so long. The bipartisan deal to suspend the debt limit for two years also paves the way for a $324 billion increase in government spending over the period above existing budget caps. That’s emboldening most dealers to pencil in increases in debt sales by fiscal 2021, which starts in October 2020.
“The deficit is rising and the impetus toward higher spending is very strong,” said Stephen Stanley, chief economist at Amherst Pierpont Securities. “By the second half of next year Treasury will have to raise coupon sizes again.”
With the president shoving aside past Republican orthodoxy on fiscal restraint and the issue not prominent among Democrats campaigning to take his job, Washington is showing no signs of slowing spending.
The House passed the debt-ceiling expansion and budget bill on July 25 and Senate Majority Leader Mitch McConnell said he expects his chamber to clear it this week for Trump’s signature.
Ahead of Wednesday’s refunding announcement, the Treasury will unveil its quarterly borrowing projections at 3 p.m. New York time Monday.
Yet even with the expansion of supply over recent years, the benchmark 10-year yield is hovering close to record lows amid expectations for central bank easing and lackluster inflation. The benchmark dipped 2 basis points Monday to 2.05%.
Three months ago, some dealers saw the possibility that the Treasury could temporarily cut note and bond sales this year, amid the Federal Reserve’s plans to halt the run-off of debt from its portfolio and the Treasury’s push to boost bill issuance. The more the Fed reinvests its debt instead of letting it run off, the less the Treasury has to borrow from the public.
But the prospect of an imminent reprieve in long-term debt issuance dimmed in May after the Treasury and its borrowing committee of investors and dealers signaled that it wasn’t ideal to make temporary changes in coupon sizes. The committee indicated that shifting issuance too far toward bills could add “rollover risk.” That message upended prospects for coupon cuts, said Mark Cabana, head of U.S. rate strategy at Bank of America Corp.
Dealers do expect the government to keep boosting auctions of Treasury Inflation-Protected Securities.
Net Treasury issuance to the public will amount to $1.2 trillion in 2019, according to JPMorgan Chase & Co. That follows a net $1.34 trillion sold last year, more than double the 2017 level.
Dealers predict bill sales will pick up in the coming weeks as the Treasury replenishes its cash balance, which it trimmed to stay under the debt limit. The Treasury will sell about $220 billion of bills through Sept. 15, according to Blake Gwinn at NatWest Markets.
“The coupon sizes Treasury currently has in place still make sense, as they have room to largely make needed changes with bills or through the already-announced increases to come in TIPS,” said Praveen Korapaty, chief global rates strategist at Goldman Sachs Group Inc.
The debt-limit and spending bill, along with forecasts for economic growth and interest costs, put the deficit on course to surpass $1 trillion by fiscal 2021, so Treasury will need to boost note and bond sales, according to Bank of America.
Even amid healthy economic growth, the deficit for this fiscal year widened to $747 billion in the first nine months, 23% higher than the same period a year earlier.
The fiscal shortfall has continued to rise under Trump as tax cuts, bipartisan spending increases and entitlements weigh on the budget outlook. And candidates for the 2020 presidential election are trying to attract voters with proposals that would only increase the gap.
Maya MacGuineas, president of the nonpartisan budget watchdog Committee for a Responsible Federal Budget, called the latest budget deal “a total abdication of fiscal responsibility by Congress and the President.”
What’s clear is the backdrop puts the $15.9 trillion Treasury market on course to balloon in the next couple of years.
“By 2021, Treasury will begin to have a problem, given deficit growth, and need to increase coupon sizes,” said Margaret Kerins, global head of fixed-income strategy at BMO Capital Markets.
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