Debt Paydown Projected by U.S. to Be Biggest in Seven Years

The U.S. Treasury Department announced the biggest quarterly paydown of government debt in seven years, as a stronger labor market helps boost tax revenue.

The drop in net marketable debt will be $78 billion in the April-June period, $38 billion more than the paydown projected three months ago, with an end-of-June cash balance of $130 billion, the Treasury said today in Washington. The improvement will be short lived -- net borrowing of $169 billion is projected next quarter, with $130 billion in cash Sept. 30.

A faster pace of hiring and soaring corporate profits are lifting tax receipts while spending increases at a slower pace. That’s helping shrink a budget deficit projected this year to be the smallest as a share of the economy since 2007.

“The incoming cash flow has been healthy, so that’s why you have a large debt paydown this quarter,” said Stanley Sun, a New York-based strategist at Nomura Holdings Inc. “The good cash flow is the result of good economic and market conditions.”

The Treasury said it issued net marketable debt of $265 billion in the first three months of the year, less than a February projection of $284 billion. The cash balance was $142 billion at the end of the January-March period, compared with a previous estimate for $130 billion.

The change in the cash balances estimates for the end of March and June helped the Treasury increase the value of the debt paydown this quarter, Sun said.

The yield on the benchmark 10-year Treasury note rose three basis points, or 0.03 percentage point, to 2.69 percent at 3:37 p.m. in New York.

Quarterly Refunding

Today’s estimates precede the department’s quarterly refunding announcement on April 30, when the sizes of monthly note and bond sales are released. At the past two refundings, the Treasury announced auctions of three-, 10-, and 30-year securities totaling $70 billion.

“Against the backdrop of a strengthening economy, the fiscal position and outlook of the federal government has improved substantially,” Seth B. Carpenter, Treasury Deputy Assistant Secretary for Economic Policy, said in a statement. “Despite the temporary, weather-related setbacks very early in the year, and very low inflation, the U.S. economy still appears poised for faster growth in 2014 and 2015,” he said today. “This acceleration should translate into more jobs and help to return the economy to full employment.”

Scale Back

Some analysts project the Treasury will start to scale back auction sizes of notes and bonds this quarter or next.

“We expect that coupon issuance will be cut this quarter or at the very least that guidance will be issued signaling cuts in the next quarter,” Ward McCarthy, chief financial economist at Jefferies & Co. Inc. in New York, wrote in a research note April 25.

Separate from the quarterly auctions, the Treasury sells shorter-term debt on a monthly and weekly basis to manage the government’s finances.

The nation’s budget deficit will narrow to $492 billion this year, about a third of its 2009 record level of $1.4 trillion, the Congressional Budget Office said on April 14. Next year, the gap will decline further, to $469 billion, the nonpartisan agency said. The 2014 deficit will be 2.8 percent of gross domestic product, according to CBO, compared with 4.1 percent of GDP in 2013.

Stronger Growth

The economy is helping brighten the short-term fiscal outlook. The U.S. expansion will accelerate to 3 percent in the second and third quarter after advancing 1.5 percent in the first three months of the year, economists surveyed by Bloomberg estimate.

The job market has shown signs of shaking off a winter slump, with employers adding 192,000 workers to payrolls last month after a revised 197,000 gain in February that was larger than initially estimated, according to Labor Department data.

Paydowns aren’t uncommon in the April-June quarter when economic growth is accelerating. The government receives a surge in individual tax payments leading up to an April 15 filing deadline and a swell of corporate receipts in June.

To contact the reporter on this story: Kasia Klimasinska in Washington at kklimasinska@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net Brendan Murray, James L Tyson

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