Three months ago, in its then latest estimate of Marketable Borrowings published on May 4, the US Treasury shocked markets when it unveiled that in the April-June quarter it would borrow a humongous $2.999 trillion, exponentially higher than what it had expected to borrow during the quarter in its previous estimate in February when it forecast a $56 billion decline in debt. And while the projected debt number stunned the market, it barely registered on the price or yield of US Treasurys for the simple reason that just weeks earlier the Fed announced it would monetize all gross debt issuance for the US when it unveiled Unlimited QE, something it has been doing since.
This massive surge in debt issuance would also result in a far higher Treasury cash balance which would be used to pre-fund various fiscal stimulus programs, and as the chart below shows, that's precisely what happened with the Treasury cash balance exploding from $400BN at the end of March to an record high just above $1.7 trillion currently, an amount that is just waiting to be spent as soon as Congress gives the green light.
In retrospect the cash surge was too much: in fact, more than double what the Treasury had expected on May 4. While the Treasury had forecast a $3 trillion increase in marketable borrowing for the quarter ending June 30, it also expected the cash balance to grow to $800 billion on that same date (shown highlighted in yellow on the table below).
And yet the final number ended up being over $922 billion higher, meaning that the Treasury had substantially overshot its funding need and had a cash buffer of nearly $1 trillion more than it had anticipated.
So with all this extra cash in hand, did the Treasury reduce its debt need for the current quarter? As shown above, three months ago the Treasury expected that it would need to borrow $677BN in the final fiscal quarter of the year ending Sept 30, which while a massive number, was still well below the $2.753 trillion it ended up borrowing (just shy of the $2.999 trillion initial forecast, a number which was not hit due to "lower-than-projected expenditures and higher receipts largely offset by the increase in the cash balance.")?
The answer, it will shock exactly nobody, was a resounding no because as it disclosed in its latest estimate of Marketable Borrowing needs, the Treasury once again surprised markets by announcing it would borrow a whopping $947BN this quarter, $270BN more than it had forecast a quarter ago, even though the Treasury started this quarter with a cash balance that is $922 billion higher than it had expected one quarter ago!
Why this unexpected increase in debt even though the Treasury was starting off with nearly $1 trillion more in cash than originally budgeted? This is how it explains it.
During the July - September 2020 quarter, Treasury expects to borrow $947 billion in privately-held net marketable debt, assuming an end-of-September cash balance of $800 billion. The borrowing estimate is $270 billion higher than announced in May 2020. The increase in privately-held net marketable borrowing is primarily driven by higher expenditures, due to a shift from the prior quarter and anticipated new legislation, largely offset by the higher beginning-of-July cash balance and higher receipts.
In other words, not only will the Treasury draw down on $922 billion in cash in the calendar quarter the ends in less than two months...
... but it will also sell enough debt to raise an additional $881 billion (net) which will also end up being spent, suggesting that in the current quarter the Treasury plans on spending a gargantuan $1.8 trillion!
But that's not all, because in its first glimpse of Oct-Dec quarter funding needs, the Treasury now expects to borrow another $1.216 trillion in privately-held net marketable debt, once again assuming that the end-of-December cash balance remains unchanged from the Sept 30 balance of $800 billion. This means that the Treasury will spend an additional $1.2 trillion in the quarter ending Dec. 31, assuming every dollar it raises in the open market is then promptly spent (since the cash balance remains unchanged).
According to the Treasury, "these estimates assume $1 trillion of additional borrowing need in anticipation of additional legislation being passed in response to the COVID-19 outbreak."
So what does this mean?
First, when putting together the actual data for the first three quarters of fiscal 2020 and adding the Fiscal Q4 estimate of $947BN in new issuance, the Treasury will borrow a record $4.5 trillion in Fiscal 2020, more than it borrowed in the previous view years combined!
Second, it means that for calendar Q3 and Q4, the Treasury will spend almost $3 trillion consisting of:
- i) a drawdown in cash from $1722 billion to $800 billion, for $922 billion, in the quarter ending Sept 30
- ii) new debt issuance of $947 billion in the same quarter and
- iii) new debt issuance of $1,216 billion in the quarter ended Dec 31
... for a grand total of $3.085 trillion in new funds (either from spending cash or raising debt).
And even if the Treasury uses some of this cash to pay down maturing Bills (which we doubt as it will most likely keep rolling this short-term debt indefinitely with rates at all time lows), it still means that there will be nearly $3 trillion left for Congress and Trump to spend as they fit in order to boost the economy in the next few months to make sure there is no imminent economic crash. It also means that for all the posturing about whether the $1 trillion Republican or $3 trillion Democrat stimulus package is accepted, the Treasury is already budgeting for the latter.
Finally, with the presidential elections are looming, we hope that we don't need to answer "why" - despite the Congressional theater - it is only a matter of time before this massive spending tsunami is unleashed.