The U.S. Treasury Department cut its forecast for federal borrowing this quarter and predicted the government’s cash buffer will decline by the end of the year, just ahead of a possible new round of debate over the debt limit.
The Treasury Department said in a statement on Monday that it now expects net borrowing of $740 billion for July-September, down from its previous forecast of $847 billion issued on April 29. Most bond traders had expected that drop.
The authorities maintained their forecast for cash balances at $850 billion at the end of September.
The Treasury also forecast a year-end cash balance of $700 billion, a forecast that will be closely watched by traders for its potential implications for the upcoming debt ceiling battle. Unless Congress passes a debt ceiling increase or another debt ceiling suspension, the reserve will be gradually depleted after the legal debt ceiling goes back into effect early next year.
The Treasury statement noted that for the quarter, the Federal Reserve’s move to begin to slow the pace at which it was reducing its holdings of Treasury securities eased the government’s need to sell more debt to the public. The Fed’s plans were not yet available when the Treasury released its last borrowing estimate. The Treasury also began the quarter with more cash on hand than originally expected.
The Treasury Department's cash balance at the end of June was about $778 billion, above the $750 billion target set by the Treasury Department at the end of April. As of last Thursday, cash reserves were about $768 billion.
“The Treasury’s year-end cash balance was around the middle of the expected range, indicating a modest decline relative to the higher cash levels expected at the end of the third quarter,” said Zachary Griffiths, senior fixed income strategist at CreditSights.
The law does not specify how much cash the Treasury can have on hand when the debt limit goes into effect. Some traders expect the Treasury to make a smaller estimate of its cash balance target at the end of December before the debt limit is restored in January. But that view is not universal. Smaller cash reserves mean slightly less bill issuance at the end of the year.
According to a footnote to the Treasury statement, the target cash balance level at the end of December "is also the assumed cash balance when the debt ceiling suspension expires on January 1, 2025" and "this assumption is based on expected cash flows under the Treasury's cash management policy, consistent with its powers and obligations, including those under the Fiscal Responsibility Act, 2023."
Treasury officials said the $700 billion year-end cash balance estimate is consistent with Treasury policy to hold about five days of cash flow as a prudent cash buffer, a preferred buffer that has grown as federal deficits have expanded over the century.
Subadra Rajappa, head of U.S. rates strategy at Societe Generale, has forecast a $550 billion cash buffer at year-end. Her counterpart at TD Securities, Gennadiy Goldberg, predicts the Treasury will end the year with an $850 billion cash balance.
The Treasury said it expects net borrowing of $565 billion in the October-December period.
Monday’s report comes ahead of Wednesday’s so-called quarterly funding announcement, when the Treasury will release its plans for long-term debt issuance. Traders widely expect the U.S. debt manager to keep note and bond sales steady for a second straight quarter. But banks including Barclays Plc, Bank of America Corp. and Goldman Sachs Group Inc. say the Treasury could revise its forecasts given the worsening deficit.
The latest bond sales plan of the U.S. Treasury Department is a landmark event every quarter for bond traders. It has now become a politically sensitive event after the Biden administration was accused by some Republicans of manipulating the issuance strategy. Some Republican politicians and economic policy critics accused Treasury Secretary Janet Yellen and her team of artificially controlling the size of long-term bonds and choosing to use short-term bonds known as bills to address additional funding needs. They believe this is part of an effort to lower yields and support the economy and the fate of Democrats before the election. Yellen said on Friday that there is no such strategy to try to ease financial conditions.
But federal borrowing needs are huge, and bond buyers are watching for any hint that the Treasury thinks larger long-term debt sales are coming. In May, the Treasury said that the already high auction sizes of bills and bonds are likely to be sufficient "for at least the next few quarters." "We don't expect the Treasury to change its previous guidance at this time, as they can continue to use short-term Treasuries to meet additional financing needs," said Jason Williams, a strategist at Citigroup.
Short-term bonds have maturities of up to a year, and their prices are closely tied to the Federal Reserve’s benchmark interest rate. With inflation having slowed noticeably in recent months, Fed officials are widely expected to signal that they will begin cutting interest rates in September. Lower rates will help ease the cost of these bonds, which have climbed as a share of the Treasury’s total outstanding debt. Relying on these short-term bills now “makes sense because they will benefit from the Fed’s rate cuts,” Williams said. “So why wouldn’t the Treasury lean on the bills a little longer?”
The latest data released on the U.S. Treasury Department website on the 29th showed that the U.S. federal government debt has exceeded the 35 trillion U.S. dollar mark.
The article is forwarded from: Jinshi Data
