US Treasury Takes Center Stage: U.S. Treasury ready to undertake big actions in fourth quarter to address increasing budget imbalance. Analysts are following this week’s quarterly refunding report because long-term Treasury yields have risen, raising fiscal deficit concerns. Deficit concerns have sent the 10-year yield up over 100 basis points since July.
The federal government’s rising borrowing costs due to the Federal Reserve‘s interest rate rises and quantitative tightening are increasing the budget shortfall. The deficit is expected to rise to $1.85 trillion in 2024 from $1.69 trillion this year, according to TD Securities They expect $677 billion in short-term bills and $1.7 trillion in notes and bonds. The Treasury has issued $1.6 trillion in bills and $1.04 trillion in longer-term debt this year.
This week, all eyes are on Monday’s announcement of borrowing estimates for the fourth quarter and the first quarter of 2024. It was the July 31 announcement of $1.007 trillion in funding needs for the third quarter that rattled the bond market, leading to a significant uptick in auction volumes.
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The Treasury is also expected to reveal a buyback program, set to launch in January, aimed at boosting bond market liquidity. Notably, the last time the Treasury conducted a regular buyback program was in the early 2000s, ending in April 2002.
In the latest refunding, the Treasury might tilt issuance toward shorter-term bills while potentially scaling back on the long end. This shift is primarily driven by concerns about the impact of additional supply on long-term yields.
Morgan Stanley’s Guneet Dhingra predicts that T-bills could become a crucial tool for financing the budget, potentially raising the percentage of T-bills as a share of outstanding U.S. debt to around 22%. Tom Simons at Jefferies notes that the current market environment supports an elevated T-bill percentage due to strong demand for shorter-term investments.
Analysts believe that the projection of rising longer-term deficits in the coming years will lead the Treasury to continue increasing auction sizes. Nevertheless, the government aims to maintain a balanced approach to minimize undue stress on the longer end of the yield curve while addressing the budget gap.
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