U.S. Sees First Debt Reduction Since 2007 as Revenue Rises

The U.S. Treasury Department projected it will reduce government debt this quarter for the first time in six years as tax receipts exceed forecasts and spending diminishes.

The pay-down in net marketable debt was estimated at $35 billion in the April-June period, compared with a projection three months ago for net borrowing of $103 billion, the department said in a statement today in Washington. Treasury officials also see net borrowing of $223 billion in the quarter starting July 1. The estimates set the stage for the department’s quarterly refunding announcement on May 1, when debt issuance plans will be released.

A sustained economic expansion and across-the-board spending cuts known as sequestration may help deliver the first net decline in debt since 2007, when the government lowered borrowing by $139 billion before the global financial crisis spawned the worst recession since the 1930s. While the economy’s strength is helping boost tax revenue, total U.S. public debt outstanding is approaching $17 trillion.

“This is a substantial revision,” said Thomas Simons, a government debt economist at Jefferies LLC in New York. Still, “it is possible that Treasury will take a wait-and-see approach in evaluating the sustainability of the recent surge in tax receipts before making adjustments” to debt auctions, he said.

After the announcement, yields on 10-year Treasury notes were little changed at 1.67 percent.

Cash Balances

The Treasury said its forecasts assume a cash balance of $75 billion for the end of the current quarter. In the three-month period that ended March 31, the Treasury borrowed $349 billion, more than $331 billion estimated in February, the department said.

At the May 1 refunding, coupon auction sizes should be unchanged from the prior quarter, said Shyam Rajan, an interest-rate strategist at Bank of America Merrill Lynch in New York, one of the 21 primary dealers obligated to bid at U.S. government debt auctions.

Larry Dyer, a U.S. interest-rate strategist with HSBC Holdings Plc in New York, another of the primary dealers, agreed that the Treasury will maintain coupon size. “The Treasury will try to keep consistent supply,” he said. “This is a bit of a blip in terms of the longer-term numbers.”

Stronger Housing

In a statement released with the borrowing needs announcement, Alexander Gelber, the Treasury’s acting assistant secretary for economic policy, said a recovery led by the private sector “continues to solidify.” He cited a stronger housing market and an improved labor market.

“Businesses are well-positioned to increase their level of investment as domestic demand strengthens and global economic conditions improve,” Gelber said in the statement.

The U.S. economy grew less than forecast in the first quarter as a drop in defense outlays undercut the biggest increase in consumer spending in two years. Gross domestic product rose at a 2.5 percent annualized rate following a 0.4 percent fourth-quarter advance, according to data from the Commerce Department issued April 26 in Washington.

Receipts in the six months through March totaled $1.2 trillion, up 12.4 percent from the October-March period a year earlier, according to Treasury data. Individual income-tax payments advanced 14.7 percent, while corporate profit taxes gained 18.6 percent, the data showed.

Fiscal Debate

Congress has suspended the nation’s $16.4 trillion debt limit through May 18. Lawmakers will be debating proposals to raise the ceiling in the coming months to ward off the possibility of a U.S. default.

Treasury Secretary Jacob J. Lew said April 16 Congress should “extend the debt limit to remove any uncertainty” and declined to estimate when the ceiling would be reached.

The Treasury may have more time than economists previously estimated before the government’s debt limit is reached as changes in tax policy and the economic rebound’s boost federal revenue.

The date the nation hits the ceiling on borrowing authority could be pushed back as far as mid-September to Sept. 30 from a previous estimate of late August to mid-September, Steve Bell, senior director of economic policy at the Bipartisan Policy Center in Washington, said in an interview last week.

A later deadline would give Congress more time to debate lifting the cap and postpone any vote until after the August recess. The Treasury uses so-called extraordinary measures to push the deadline further.

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