Treasury Boost Quarterly Borrowing Estimate To $189BN: Full Quarterly Refunding Preview
The US Department hiked its estimates for US debt borrowing in the current quarter, citing lower net cash flows.
In a statement published today, and ahead of Wednesday's Quarterly Refunding Announcement, the US Treasury said that it now expects to borrow $189 billion in net debt for the current quarter, up ~$80 billion from the $109 billion it had forecast in February. The estimate assumes a June quarter-end cash balance of $900 billion, the same as the prior forecast.
According to the Treasury, the borrowing estimate is $80 billion higher than announced in February 2026, primarily due to lower projected net cash flows (i.e., lower tax receipts), partially offset by the higher-than-assumed beginning-of-quarter cash balance (the cash balance at the start of the quarter was $893 billion, higher than the $850 billion estimated in February).
Excluding the higher-than-assumed beginning-of-quarter cash balance, the current quarter borrowing estimate is $122 billion higher than announced in February.
During the January–March 2026 quarter, Treasury borrowed $577 billion and ended the quarter with a cash balance of $893 billion. In February 2026, Treasury estimated borrowing of $574 billion and assumed an end-of-March cash balance of $850 billion.The $3 billion in higher borrowing resulted primarily from the higher-than-assumed end-of-quarter cash balance, partially offset by higher net cash flows. Excluding the higher-than-assumed end-of-quarter cash balance, actual borrowing was $40 billion lower than announced in February.
The Treasury last month slashed its issuance of Treasury bills in anticipation of a wave of US tax receipts due April 15. It has since started increasing the sizes of its shortest-dated bill auctions, beginning with the six-week tenor
Looking ahead, Treasury expects to borrow $671 billion, targeting a $50 billion increase in end-September cash balance to $950 billion. While it may sound like a lot, the third calendar quarter of the year traditionally has the biggest borrowing needs (in 2025 the US borrowed $1.058 trillion in Q3, $762 billion in 2024, $1.01 trillion in 2023, etc).
Looking beyond the near term, Deutsche Bank's base-case deficit outlook for FY2026 – FY2028 is modestly smaller than projected three months ago, driven by expectations for stronger economic growth. The bank's economists now forecast deficits of:
- FY2026: $2,068bn ($50bn smaller)
- FY2027: $2,137bn ($77bn smaller)
- FY2028: $2,255bn ($230bn smaller)
However, DB's high-estimate scenario, which assumes passage of the Department of Defense budget proposal, implies materially wider deficits versus the base case. Under this scenario, to which DB only assigns 35% odds, deficits would rise by:
- FY2026: ~$200bn
- FY2027: ~$300bn
- FY2028: ~$100bn
Regarding the repayment of IEEPA tariffs, DB assumes total payments of $175bn over the next three years. Given the relatively manageable size, as well as uncertainty around the timing and pace of payments, Treasury will likely address them through increased bill issuance rather bringing forward its coupon increases.
- FY2026: ~$50bn
- FY2027: ~$100bn
- FY2028: ~$25bn
Today's Treasury announcement of Marketable Borrowing Estimates always precedes the Quarterly Refunding Announcement, which is scheduled for this Wednesday at 8:30am. Here is a preview of what to expect courtesy of Deutsche Bank:
- Treasury might adjust its statement language to soften the forward guidance on coupon auction sizes at this refunding announcement. A possible change would be dropping “at least” while retaining the expectation for unchanged coupon sizes over “the next several quarters”. Accordingly, DB now expects nominal coupon increases beginning in February 2027.
- For buybacks, DB expects $38bn in liquidity-support operations targeting off-the-run securities. In addition, the bank sees up to $25bn of purchases in 1-month to 2-year for cash management around the June corporate tax date. Treasury will likely evaluate and announce new size increases along with any technical adjustments at the next refunding in August.
- Treasury yields have generally risen, and swap spreads have tightened following four consecutive refunding announcements. Given DB's slight bearish bias on duration and medium-term preference for wider spreads, the German bank recommends establishing shorts ahead of the QRA and using any post-announcement pullback in spreads to re-enter wideners.
Let's take a closer look at each of these, starting with...
Coupon and TIPS financing
In line with Treasury’s gradual and incremental approach to soften its forward guidance around coupon sizes in recent refunding announcements, DB's Steven Zeng expects a further modest adjustment to the statement language in the May refunding. In February, Treasury stated:
“Based on current projected borrowing needs, Treasury anticipates maintaining nominal coupon and FRN auction sizes for at least the next several quarters. Treasury is monitoring SOMA purchases of Treasury bills and growing demand for Treasury bills from the private sector. Looking ahead, Treasury continues to evaluate potential future increases to nominal coupon and FRN auction sizes, with a focus on trends in structural demand and potential costs and risks of various issuance profiles.”
A possible change would be removing “at least” from the statement while retaining the expectation for unchanged coupon sizes over the “next several quarters”. This would suggest that the shelf life of the current guidance is shortening and that the window for coupon increases is drawing nearer. Accordingly, DB now expects nominal coupon increases to be announced at the February 2027 refunding. Tentative auction size estimates are shown in the table below
For TIPS, DB expects auction sizes to remain unchanged relative to the most recent auction cycle, with $19bn 10-year TIPS reopening in May, $24bn 5-year TIPS reopening in June, and $21bn 10-year TIPS new issue in July.
Bill issuance
Zeng expects small increases in short-dated bill sizes to be announced next week, leaving net bill supply modestly positive beginning mid-May through early June. The strategist also tentatively expects the 52-week bill auction to rise by $2bn to $52bn. In early June, he projects reductions in bill sizes ahead of the June 15th corporate tax date. Then, a series of larger increases will be implemented in July, leaving bill supply to rise more rapidly during late summer months. The forecast for net bill issuance in the April-June quarter is -$200bn, and in the July-September quarter is +$382bn. Estimates of bill auction sizes and weekly net issuance is shown in the table below.
For calendar year 2026, DB's current forecast for net bill issuance is $813bn, roughly $50bn higher than the forecast provided three months ago. However, after subtracting Fed purchases and short-end buybacks (which reduce the supply of bill-like coupon securities), the estimated residual supply to private investors is only $176bn.
Buybacks
Zeng expects $38bn in liquidity-support buybacks targeting off-the-run securities to be announced for the May-July period. Separately, he also expects up to $25bn of purchases in the 1-month to 2-year sector for cash-management purposes to be scheduled around the June corporate tax date. These combined purchases are consistent with the increased operation sizes announced last August, and together they imply roughly $150bn in liquidity-support and $150bn in cash-management operations for the full year. In addition, Treasury could unveil new details on potential buyback enhancements. Treasury previously explored yield-spread bidding and debtswitch operations in the February refunding. However, implementation likely involves time and plenty of advanced notice, so the bank does not expect any actual changes will be announced at this refunding. Treasury will likely evaluate and announce new size increases along with any technical adjustments to buybacks at the next refunding in August.
Dealer Discussion topics
In the primary dealer questionnaire, Treasury sought views on how changes in bank regulation are affecting demand and liquidity in the Treasury market. It also asked dealers for feedback on changing floating-rate note (FRN) maturity dates, so they fall on a business day. DB's responses to both questions are summarized below.
Bank regulation reform
The easing of eSLR last year likely had a positive effect on Treasury demand and market liquidity, although other market structure changes and monetary policy initiatives (for example, the removal of Wells Fargo’s asset cap and the Fed’s reserve management purchases) make it difficult to observe the effect of eSLR alone.
Broadly speaking, the new eSLR calculation enables dealers to hold more Treasuries on balance sheet, which is supported by the weekly Fed data of dealer net positions which has shown a substantial increase since the rule change. Reduced eSLR constraints also make dealers more likely to engage in swap spread trades directly or facilitate them for clients, which increases demand for Treasuries and resulted in wider swap spreads. On the flip side, these activities lead to crowded positioning and thereby increases the risk of large price changes during volatility shocks.
Bank capital rules proposed in March could add to demand for Treasuries at the margin, though likely less impactful than the eSLR easing. Banks with freed-up capital can deploy them into Treasuries, although broader credit demand in the economy may ultimately determine whether banks expand into securities or loans. The GSIB surcharge proposal appears particularly beneficial for dealer banks with balance-sheet intensive business models and a low RWA base, which helps increase overall market-making capacity.
Potential regulatory changes aimed at reducing bank liquidity requirements, such as adjustments to Internal Liquidity Stress Testing (ILST), discount window reform, or adding a liquidity saving mechanism (LSM) to the Fed’s payment system, could allow banks to reallocate reserves into repo or securities, further supporting Treasury demand and market liquidity.
FRN maturity date
For FRNs that do not mature on a business day, the lack of accrued interest is a major concern for 2a7 investors. As a result, many 2a7 funds sell such securities back to the dealers as the maturity month approaches, which add pressure to dealer balance sheets. Treasury should therefore consider changing stated maturity dates for FRNs, so they always occur on a business day. DB does not see the same need for non-FRN securities, which generally have a broader and more diversified investor base that is less affected by this issue. The primary benefit would be stronger FRN liquidity and reduced need for dealers to warehouse affected securities on their balance sheet. A potential drawback would be increased fragmentation between FRNs and other Treasury securities, potentially resulting in similar but not identical maturity dates leading to pricing distortions in the front end of the curve.
Market reaction around QRA
In recent quarterly refunding announcements, Treasury yields have generally risen, and swap spreads have narrowed in response. While that reaction is not fully justified, it could reflect investor disappointment on Treasury not delivering a more market-friendly outcome. (expectations for long-end coupon size cuts and more explicit use of buybacks as a WAM management tool are extremely unlikely.) Given that Treasury will continue to loosen its guidance around coupon issuance sizes, the market could initially interpret any change to its statement as a negative. Given DB's modestly bearish outlook on duration, the bank recommends using the refunding announcement to set up for shorts. Conversely, as DB holds a medium-term preference for wider swap spreads, the bank would look to use any post-announcement pullback in spreads as an opportunity to re-enter wideners.
More in the full DB note available to pro subs.