The US Treasury has just released its revised debt issuance/funding schedule for the Q4 as well its fresh estimates for Q1 2011 borrowing needs. While much of this will certainly be re-revised as it will likely soon become a function of massive QE2 driven demand than supply, as of today, the Treasury is expecting that it will have $362 billion in net marketable issuance in the current quarter (as cash balances decline by $10 billion), although the kicker is next quarter, where the Treasury now anticipates the issuance of $431 billion, in addition to a cash decline of $30 billion, implying over a $460 billion change in net debt levels. Now for some back of the envelope math: with the UST having already issued $97 billion in debt in October (per DTS), it means that Geithner anticipates issuing $265 billion in November and December. It also means that $431 billion has to be issued in January through March of 2011. Furthermore, as the most recent cash balance was $18.4 billion (ex SFP), this number will need to be replenished to $70 billion by March 2011, implying the need of another ~$52 billion in incremental debt funding. Altogether this means that roughly $750 billion in additional debt will have to be issued over the next 5 months. And since the most recent number of total debt subject to the ceiling was $13.609 trillion, adding $748 billion to this number results in $14.357 trillion. Which just happens to be $63 billion more than the recently revised debt ceiling of $14.294 trillion. Thus the US debt ceiling will have to be revised higher one more time, most likely in February or March of 2011.
We say likely, because as QE2 will suck up about $100 billion in Treasury issuance per month, and thus result in virtually zero net new issuance, the Treasury will likely be forced to emit even more Treasuries to make sure the entire curve does not pancake and lead to a collapse for the banks whose 6 Month - 30 Year funding carry trade goes extinct.
The full revised debt issuance schedule is presented below:
To say that the UST's Q1 issuance was greater than expectations, is an understatement. Even Goldman was surprised by the funding needs in Q1, and has some interesting reads on what it may mean for taxation assumptions:
Treasury cuts Q4 net borrowing estimate from $380bn to $362bn vs. GS $330bn.
Treasury estimates Q1 net borrowing at $431bn vs. GS $350bn.
1. The Treasury trimmed its Q4 borrowing estimate by only $18bn, much less than the $50bn we had estimated. However, most of the difference is accountable to a higher cash balance in Treasury’s figures relative to our own—$300bn vs. $275bn. Hence, no major surprise here.
2. The same cannot be said for the first quarter, where the Treasury estimates a $431bn net borrowing need despite a $30bn assumed reduction in its cash balance. We have been estimating $350bn with no change in the cash balance, a difference of more than $100bn in underlying financing needs (i.e., net of changes in the cash balance). While the Treasury does not amplify on the assumptions underlying its estimates, one possible explanation is that the agency does not want to assume the extension of any tax cuts until legislation actually passes. We, on the other hand, are assuming an extension along the lines long proposed by the Obama administration.
3. If the Treasury’s figures are right, they would imply that the agency has less room than we had previously thought to reduce the sizes of coupon auctions, though we are reluctant to push this interpretation too strongly given the sizable uncertainties that exist on these estimates.
In other words, as we have been saying all along, Geithner will be forced to come up with greater issuance sources soon, due to both the funding needs, and the QE2 demand pull.
As for the debt ceiling, it may soon be the case that raising it will not be the trivial formality for Congress it has traditionally been, especially once Republicans retake Congress which is now a given.
We read the following in Dow Jones:
A senior House Republican said Friday he would push for a direct up or down vote to increase the federal government's borrowing capacity early next year.
Rep. Eric Cantor (R., Va.), who is almost certain to become the Majority Leader if the Republicans retake the House in the mid-term elections on Tuesday, said he wouldn't continue the recent history of using parliamentary procedure to disguise the vote's occurrence.
Cantor was speaking on a conference call alongside Robert Hurt, a Republican state senator, who is contesting Virginia's 5th District against freshman Rep. Tom Perriello (D., Va.).
Cantor said he hoped Republicans would be able to establish a track record on fiscal discipline before a vote to increase the total amount of debt the federal government is legally allowed to carry on its books.
The current federal debt total stands at around $13.7 trillion. The debt ceiling was lifted by Congress early in 2009 to $14.1 trillion. That probably sets up a need to increase that limit further in the first two months of 2011.
Democrats routinely used arcane parliamentary procedure to allow some of their members to disguise their vote on increasing the debt ceiling.
Even though the vote itself is largely a formality because the funds have already been spent by the Treasury, Democrats feared Republicans would seek to use a vote in favor of increasing the total the federal government can borrow as a political weapon. Next year, if the polls are correct and the Republicans take back control of the House, the shoe will be on the other foot and it will be up to them to lift the debt ceiling.
This could be an especially tough vote for Republicans who have attempted to make the midterm elections a referendum on Democratic spending in many parts of the country.
In the extreme unliklihood that Congress failed to increase the debt ceiling, the U.S. could be forced to default on its debt obligations. In that extreme scenario, global markets would be roiled, the value of the dollar could plummet and the U.S. economy abruptly pushed back into recession.
Ah, the sad reality of just how pathetic debt ceiling raise-to-debt ceiling raise US financial existence has become...