US Treasury cuts Oct-Dec borrowing estimate to USD776B, yields ease

Oct 31 – The US Treasury Department said on Monday it expects to borrow USD 776 billion in the fourth quarter, USD 76 billion less than its forecast in July, citing increased revenue estimates, bringing some relief to bond markets rattled for months by a glut of new debt.

A US Treasury official said revenue is expected to rise in the October-December period partly because income tax payments from California and some other states deferred due to natural disasters were now starting to flow into the Treasury.

The projections prompted US Treasury debt yields to fall slightly, with the benchmark 10-year yield last at 4.88%.

Treasury yields, especially on longer-dated securities, have risen with growing bond supply as budget deficits widened and the Treasury rebuilds its cash balance drained by a debt ceiling standoff in Congress in the spring.

“Interest in today’s borrowing projections have been higher than normal,” said Thomas Simons, money market economist at Jeffries in New York. “Given that it isn’t on the higher end of expectations, it’s causing some relief in the market.”

Investors awaited the Treasury’s quarterly refunding statement on Wednesday for details on which maturities will be increased as the department pursues record borrowing levels.

The Treasury said in July it expected to borrow $1.007 trillion in the July-September quarter, $274 billion more than it had predicted in May, sparking a large bond sell-off.

‘Sloppy’ auctions

Auction sizes have been growing across most maturities, and some recent sales have led to what some dealers have called “sloppy” results.Last week’s sale of USD 52 billion of 5-year Treasury notes, for instance, was the largest ever outside of the COVID-19 issuance bulge from 2020 through early 2022. It featured the lowest-bid-cover ratio, an indicator of investor demand, in more than a year and the transaction went off at a slightly higher yield than predicted by the so-called “when-issued” market.

The 5-year sale was later blamed for sending yields higher across government bond markets.

Steven Zeng, US rates strategist at Deutsche Bank, said he did not believe the reduced estimates would push down the
“term premium” on longer dated securities, adding that much depended on the composition of Wednesday’s refunding announcement.

“We still think the term premium has some room to move up,” Zeng said. “There still may be some ways the Treasury surprises the market if they choose to be more aggressive” with higher long-end issuance.

Total outstanding US debt has grown to USD 33.7 trillion, from USD 31.5 trillion in June and has surged from USD 23.2 trillion in early 2020 before the pandemic led to record US deficits.

Quarterly records

The reduced USD 776 billion borrowing estimate would still be a record for any October-December period, exceeding the USD 689 billion in the 2021 quarter boosted by high COVID-19 relief outlays.

The Treasury also estimated borrowing USD 816 billion in the first quarter of 2024, a record for that period, though it noted cases in which borrowings plus cash balance drawdowns have been higher for the period. The Treasury estimates a high cash balance of USD 750 billion for both end-December and end-March.

In the third calendar quarter of 2023, the Treasury said it borrowed $1.01 trillion and ended that period with a cash balance of USD 657 billion.

That was the largest net debt issuance during a third quarter. It was, however, well below the almost USD 3 trillion the Treasury borrowed in the second quarter of 2020, when the government ramped up spending due to COVID business closures.

(Reporting by Karen Brettell and David Lawder; Additional reporting by Daniel Burns and Davide Barbuscia; Editing by Andrea Ricci and Richard Chang)