A statue of Albert Gallatin, former U.S. Treasury secretary, stands outside the U.S. Treasury building in Washington, D.C., U.S. (Photographer: Andrew Harrer/Bloomberg)

U.S Debt Sales Top Crisis-Era Levels as Fiscal Bump Spurs Growth

(Bloomberg) -- The U.S. Treasury Department announced debt sales will surpass levels last seen when the country was digging out of its worst economic crisis since the Great Depression. This time around, fiscal stimulus is adding fuel to an already growing economy.

A ballooning budget shortfall -- fueled by tax cuts, spending hikes and an aging population -- is driving the U.S. Treasury to raise its long-term debt issuance at its quarterly refunding auctions to $83 billion from $78 billion three months ago, the department said Wednesday. The need for the Treasury to raise auction sizes for a fourth straight quarter is also partially driven by the Federal Reserve’s decision not to replace some of its Treasury holdings when they mature as it winds down crisis-era stimulus measures.

U.S Debt Sales Top Crisis-Era Levels as Fiscal Bump Spurs Growth

The debt issuance at this quarterly refunding beats the previous record of $81 billion first set by former Treasury Secretary Timothy Geithner in 2009 when the U.S. was recovering from the Great Recession. This time borrowing is surging as the economy hums along at a 3.5 percent annual growth rate and unemployment is near a half-century low.

Treasury’s Fourth Quarter Refunding Plan
  • Treasury sees $1 billion auction size increases for 2-, 3- and 5-year notes in both of next two months; most primary dealers had expected increases over the next three months, which would have been in line with what the Treasury did last quarter
  • Sales of 7-, 10-, 30-year securities to be raised by $1 billion in November and then kept steady through January; this was largely as most dealers had expected
  • Treasury to sell $83 billion in long-term debt next week versus $78 billion in August’s refunding week sales; next week’s sales to include $37 billion of three-year notes, $27 billion of 10-year notes and $19 billion of 30-year bonds
  • Raises 2-year floating-rate note sale by $1 billion in November
  • Various changes to TIPS calendar, with total tips issuance rising $20 billion-$30 billion in 2019; no TIPS supply changes over next three months; adds new CUSIP 5-year to TIPS calendar, with new security to be introduced October 2019
  • Treasury says auctions to raise $28.7 billion in new cash
  • Sees weighted average maturity stable at or around current levels

The yield on the benchmark 10-year note climbed as much as 4 basis points to 3.16 percent Wednesday.

The Treasury release may draw more attention to rising federal deficits less than a week before midterm elections that will determine whether Republicans maintain control of Congress. President Donald Trump frequently criticized his Democratic predecessor for running up the budget deficit, and in 2012 recommended banning lawmakers from reelection if Congress couldn’t balance the budget.

Waning support for U.S. government debt from the Fed, combined with Trump’s deficit-spending policies, are weighing on the debt load that he inherited from Barack Obama. In Trump’s first full fiscal year, the U.S. budget deficit grew to $779 billion, the highest level since 2012, despite having an economy which Trump budget director Mick Mulvaney last week called a “Goldilocks moment” of low unemployment and contained price growth.

U.S. National Security Adviser John Bolton called the national debt a “threat to the society” that requires significant cuts to the government’s discretionary spending. Bolton, speaking Wednesday at an event hosted by the Alexander Hamilton Society in Washington, said he expects U.S. defense spending “to flatten out” in the near term. He said he didn’t anticipate major cuts to entitlements such as Medicare and Social Security.

The Treasury Department has also highlighted the need to sell more debt as the Fed allows its $4.2 trillion balance sheet to slowly shrink. With the central bank providing less support to the market, the Treasury will rely on the public to buy more of its debt.

While some analysts are raising concerns over demand for Treasuries as more debt is issued, Secretary Steven Mnuchin dismissed those concerns in comments earlier this month.

Deputy Assistant Secretary for Federal Finance Brian Smith echoed Mnuchin’s remarks Wednesday. “The Treasury market is the deepest and most liquid market in the world, and we’ve been able to finance the deficit effectively through all kinds of economic environments,” he told reporters after announcing the refunding plans. “I’m confident that we’ll be able to continue to issue securities and fund the government at the lowest cost to the taxpayer.”

The non-partisan Congressional Budget Office forecasts the budget gap will reach $973 billion in fiscal 2019 and exceed $1 trillion the next year. Goldman Sachs Group Inc. predicts the deficit will reach $1 trillion and $1.125 trillion respectively.

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