US Debt Sales To Surge: Treasury Raises 2018 Borrowing Need To $1.33 Trillion

America's funding needs are starting to grow at a dangerous pace.

Even before the NYT reported of Trump's startling suggestion of a further $100 billion tax cut in the form of an inflation-adjusted capital gains tax cost basis which mostly benefits the wealthy, earlier today the U.S. Treasury said it expects to borrow $56 billion more during the third quarter than previously estimated, while market participants expect shorter-dated Treasuries to absorb the brunt of the new supply as the Trump administration grapples with a mushrooming budget deficit.

In the Treasury's latest quarterly Sources and Uses table, it revealed that it expects to issue $329 billion in net marketable debt from July through September, and $56 billion more than the $273 billion estimated three months ago, in April. assuming an end-of-September cash balance of $350 billion, matching its previous estimate. It also forecast $440 billion of borrowing in the final three months of the year, with a $390 billion cash balance on December 31.

The borrowing estimate for the third quarter is the highest since the same period in 2010 and the fourth largest on record for the July-September quarter, according to Reuters. In the second quarter, net borrowing totaled $72 billion, slightly below the earlier prediction of $75 billion.

The US fiscal picture continues to darken as a result of rising social security costs, military spending and debt service expenses while corporate tax income is declining after last year’s tax reforms. As a result, the federal budget deficit is expected to reach $833 billion this year, up from $666 billion in the budget year ended last September, a number that is well below the net funding demands for the US Treasury.

The new projections put total net borrowing at $769 billion for the second half of 2018 and a whopping $1.33 trillion for the whole year. The federal budget deficit totaled $607 billion through the first nine months of the fiscal year that ends Sept. 30, up 16% compared with $523 billion from the same period a year earlier. In late June, the CBO forecast that total government spending would exceed revenue by $1 trillion in 2020. That would suggest that the net financing need of the US in two years could be as high as $1.5 trillion.

Yields on 10-year Treasurys rose to session highs of almost 2.98% following the release of the borrowing outlook according to Bloomberg data, although the bulk of today's move was in anticipation of a surprise announcement by the BOJ. Meanwhile, the 2-year yield was steady around 2.67%, near the lows for the day.

“Because of surprising declines in corporate tax revenues, the federal deficit is constantly under discussion this month,” FTN rates strategist Jim Vogel told Reuters. Adding to the supply of bonds hitting the market, the Fed is also trimming its vast holdings of Treasury debt as part of Quantitative Tightening, with some $40BN in monthly reductions in the third quarter.

* * *

On Wednesday, as part of its quarterly refunding announcement, the Treasury will detail how it expects to spread the new supply across bond maturities ranging from one month to 30 years. As we discussed over the weekend, bond analysts expect faster increases in maturities out to five years, which could push their yields up at a quicker pace than those for longer-dated securities, resulting in further flattening of the yield curve.

According to Reuters, the Treasury is expected to increase sales of 2 and 3 Year notes by $1 billion a month, similar to its increases in the second quarter. Securities maturing in 7 to 30 years should increase at a rate of $1 billion per quarter, resulting in ever increasing supply to fund Trump's fiscal program. Some estimate that five-year note sales could also ramp up by $1 billion more per month compared with the same amount for the whole of the second quarter.

While one outcome of emphasizing short-dated supply will be further bond flattening, short- and intermediate-dated debt is seen as having strong demand and relatively attractive rates. Avoiding a similar sharp boost in supply of long-term rates avoids a large increases in yields that could create an economic drag.

The market, however, is bearish on all Treasuries across the curve and as we showed over the weekend, the latest CFTC data showed that speculators last week have put on record aggregate Treasury short positions in five-year, 10-year and 30-year Treasuries futures, while also expanded to their short two-year note position.

Finally, investors will be looking for clues when the Treasury plans to introduce new two-month bills and five-year Treasury inflation-protected securities, as both have been discussed recently by the Treasury Borrowing Advisory Committee, even if many don't see these as being introduced this quarter.

Source: US Treasury

Comments

DingleBarryObummer dirty fingernails Mon, 07/30/2018 - 21:10 Permalink

I just hate that the ZH community went from fight club to trumpian group-think.  And then there's some people who are just group-think anti-trump (omg he's a masonic Jesuit satanist fascist russian-puppet kabbalist shama lamma ding dong), which is just as bad.  Not a whole lot of people holding it down for independent thought.  Some things I post I realize later don't make any sense, but at least I'm trying, which is a lot more than I can say for most people here.

In reply to by dirty fingernails

jmack Yen Cross Mon, 07/30/2018 - 22:03 Permalink

I predicted 40 trillion in debt by the end of Trumps 8 year administration.   That may have been conservative.  If they go this route, which they will because it is the path of least immediate pain, and greatest delayed pain (a not insignificant qualification), they could hit 60 or even 120 trillion in debt by 2024.   

 

Really the only limit is how long the rest of the world will tolerate getting paid in more and more worthless paper. from what I see, it wont be long.

 

    

In reply to by Yen Cross

Balance-Sheet user2011 Mon, 07/30/2018 - 21:08 Permalink

Hard to make a blanket statement but at the moment given these two alternatives the trade deficit is very damaging to the industrial plant/manufacturing/heavy industry in the US. As many have pointed out the USA and other countries are literally building up China through these deficits which are surpluses for China, Germany, etc.

The National Debt will never be paid back so is irrelevant in a sense. It might decline at some point but will never be repaid as it represents relatively permanent additions to the US currency supply. For purposes of flexibility and accounting purposes it appears on the books as a debt.

Politicians get a charge out of scaring people into voting for them by suggesting that the voter and grandchildren will have to pick cotton in Mississippi for centuries to pay it back so you hear about it all the time.

In reply to by user2011

LetThemEatRand Mon, 07/30/2018 - 20:47 Permalink

Reagan also said he was going to balance the budget by cutting taxes on the wealthiest and growing the military and pretty much all government functions that don't benefit the average person (those need to go).  And people still believe he was the champion of the common guy.  I suppose people here will still be wearing MAGA hats in a few decades.

 

silverer LetThemEatRand Mon, 07/30/2018 - 20:57 Permalink

Actually, even though Reagan spent, remember who controlled the purse strings. He had a Democratic congress. Reagan had the economy doing well. The folks that let the country down were the typical criminals that fill the halls of Congress. They could have cut (or just held) instead of continuing to increase spending in the following years. The last budget surplus was under Clinton, produced by the Republicans under Newt Gingrich as speaker. Gingrich was universally hated and called "The Grinch". He was replaced by Dennis Hastert (R), who piled on the spending. After that, Nancy Pelosi (D), the all time spending champ. Even now you hear whining from the press when you resist letting the elitists rob you and your children.

In reply to by LetThemEatRand

Balance-Sheet consider me gone Tue, 07/31/2018 - 01:00 Permalink

SocSec payroll taxes were always straight taxes that were put into General revenue at the UST without being shown on the budget law specifically although they had always been spent as they came in. By showing it on the annual budget Clinton made a surplus appear though nothing changed in reality. The "trust fund" is a 100% propaganda unicorn but the lie has been repeated so may 1000s, 10,000s of times people believe that such a fund either exists or once existed though that has never been the case. Like all politicians FDR was a pathological liar but for everyone's good.

In reply to by consider me gone

Yen Cross LetThemEatRand Mon, 07/30/2018 - 21:09 Permalink

 Anything was better after Carter, the peanut farmer, and Iranian hostage debacle.

Interestingly, people like to blame Bush-II for the 2000 Tech meltdown, when in fact it was Slick Willy and his assclown sidekick Andrew Cuomo that was/were in charge of housing and urban affairs, and rolled back lending requirements, which led to the 2007-8 housing meltdown.

 Bush #2 just never made any effort to curtail the fraud. Don't get me started on Glass-Steagall Act- repeal by Slick Willy. That's how morons like Larry Fink, made their fortunes.

 Obungler is in a league of his own, when it comes to debt accumulation, on the taxpayers back.

 * someone have his pee-pee in a twist? The truth hurts ya basement baby.

In reply to by LetThemEatRand

james diamond squid Mon, 07/30/2018 - 20:49 Permalink

mother fuckers issuing primarily short dated maturities, because they know they are soon to return to ZIRP or NIRP.

if rates were really to be normalized......issuing in to the long end would be their move.

ZIRP or NIRP as soon as the asset "markets" needs it. lol.  

H H Henry P P … Mon, 07/30/2018 - 21:01 Permalink

It's a game of musical chairs.  Just keep issuing debt until something caves.  There is a ZERO percent chance this country will default.  We are just gonna power through it with mass inflation... terrible.

 

BUY GOLD

Twox2 H H Henry P P … Mon, 07/30/2018 - 22:19 Permalink

Not sure when we crossed the rubicon, but pretty sure everybody has wet feet. Now it's simply a game of getting the last tangible goods in exchange for worthless paper...until it implodes. Not the worst strategy for an intractable situation, assuming we were building shiny new infrastructure and investing in new productive technologies...but we are not.  We face the worst of both worlds: a failing currency and rusty bridges. My Falken moment has arrived.

In reply to by H H Henry P P …

umdesch4 Mon, 07/30/2018 - 21:06 Permalink

"[...]corporate tax income is declining after last year’s tax reforms" but "because of surprising declines in corporate tax revenues, the federal deficit is constantly under discussion this month".

So was it a surprise, or wasn't it? Or is only "FTN rates strategist Jim Vogel" surprised?

I'm not surprised.

Balance-Sheet Mon, 07/30/2018 - 21:18 Permalink

Mr. Powell simply must be canned at this point. Seeing the revision I will have to move Fed asset purchases to 80-90B per month on top of a freeze on the current program. Year 1955 is never going to return and there will be no possible normalization given the basic economic facts and related demographic stats.

Here is the deal: Congress CREATES the deficit through law when it passes the Budget and changes to the Tax law. The UST is tasked with arranging the financing for the deficit the Congress created. The Fed, a creature of Congress, interfaces with the UST to arrange the financing at the lowest possible cost to the USG while maintaining optimized employment level and the USG denominated inflation rate of 2-3%.

If Mr. Powell feels unable to carry out the assignment he should resign as a point of personal integrity and if he declines to leave with dignity he should be turfed out on the lawn.