Update on Treasury Market

The US Department of Treasury has continued to issue new debt at a torrid pace as expected following the debt ceiling standoff this spring. So far, the market has been able to absorb new debt issuance, but a recent announcement indicates that more borrowing is required over the back half of 2023. Let’s dig into what’s going on in the US Treasury securities market, starting with yesterday’s announcement on anticipated borrowing:

On July 31, the US Department of Treasury announced their estimates for expected net borrowing over the Third and Fourth quarters of 2023. The Treasury Department expects to borrow just over $1 trillion in the 3rd quarter to bring up the general account balance to $650 billion. The announcement noted that their borrowing estimate is $274 billion higher than what they estimated in May in part due to projections of:

• Higher than anticipated outlays and lower expected tax receipts ($83B combined); and
• Lower starting general account balance to start 3Q2023 than originally projected (by $148 billion).

Looking further out, the Treasury expects to borrow $852 billion in the 4th quarter and plans to bring up the general account balance to $750 million by the end of 2023, according to the July 31 announcement.

These projections are for net debt issuance (they do not include rolling of debt as it matures). Since the debt ceiling was lifted in early June, the Treasury Department has already been busy issuing new Treasury securities, but most of it has been in the form of short T-bills.  For the month of July 2023, for example, the Treasury auction results indicated approximately $30 Billion raised in T-Bonds (20 and 30 year term), $192 Billion in T-Notes (2-10 year), and $1.275 Trillion in T-Bills (1 year and under). As a result of the Treasury’s heavy reliance on shorter dated Bills, about $984 billion in T-Bills issued this past month alone will have to be rolled forward again before the end of 2023.

Many investors expect the Treasury to increase the issuance of longer dated Notes and Bonds, possibly starting with the pending announcement this week on August auctions of 10, 20, and 30 year paper. The good news is that investor appetite to buy fresh debt remains strong. Coverage ratios have been consistently in the 2.5 to 3 range, meaning that the total dollar amount of bids received at auction has been at least 2 and a half times higher than the total dollar amount of bids accepted.

When I last wrote about the Treasury market two months ago, the US Treasury was projected to issue between $1 and $1.5 Trillion in additional debt from July to December 2023. Now the Treasury Department expects new debt issuance over the second half of 2023 to approach $2 trillion in total.  Meanwhile the Federal Reserve continues to sell down Treasury securities off its balance sheet to the tune of about $60 Billion per month. While the above debt issuance figures are concerning, there is nothing yet visible in the primary or secondary trading markets to suggest that the market is over saturated. Nonetheless, the sheer volume of Treasury issuance in the coming months necessary to finance Federal spending suggest that rates may not come down in the near to intermediate future. We’ll continue to monitor markets in the meantime.

UPDATE: on Aug 2, the Treasury Department announced upcoming auctions in August for some longer dated paper. The size announced for the 30 year Bond auction is $23 billion (vs $18 billion in July), and for 10 year Notes they plan to auction $38 billion (vs $32 billion in July). The planned 4 week T-bill auction is $70 billion, precisely the size of each prior weekly auction in July. These announcements suggest a gradual increase in longer maturity issuance.