U.S. Raises Longer-Term Debt Sales as Budget Deficit Worsens

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  • It raises size of 3-, 10- and 30-year debt sales next week
  • Treasury also plans to lift all other tenors sold over quarter
Harvard Professor Martin Feldstein says the projected deficits are "terrible."

President Donald Trump’s administration will increase the amount of long-term debt it sells to $66 billion this quarter, marking the first boost in borrowing since 2009 as the Treasury seeks to cover mounting budget deficits.

The Treasury is shaping the government’s borrowing plans against a budget shortfall that grew to $665.7 billion last fiscal year because of higher spending on Medicare, Social Security and other programs for an aging population. The gap is expected to widen further due to tax cuts enacted this year that are projected to reduce revenue by almost $1.5 trillion over the next decade.

Treasury Secretary Steven Mnuchin’s department also partly linked the larger sales of debt to the Federal Reserve cutting its crisis-era portfolio of Treasury bonds, which it bought to stimulate the economy following the financial crisis. As the Fed slows the amount of government debt it reinvests, the Treasury has to make it up through public borrowing.

Mnuchin’s debt management team will sell next week $26 billion of 3-year notes versus $24 billion in November, it said Wednesday in its refunding announcement. The department also lifted to $24 billion the sale of 10-year notes from $23 billion and 30-year bonds to $16 billion from $15 billion, also to be auctioned next week. Total offerings rose to $66 billion from $62 billion in November.

The Treasury said it expects to lift sales of 2- and 3-year note auctions by $2 billion per month over the quarter. It will also boost 5-, 7- and 10-year notes and 30-year bond auction by $1 billion each month starting in February. Sale of 2-year floating-rate notes will also be increased by $2 billion beginning next month. Additional borrowing needs will be addressed by increasing bill sales.

The emphasis on boosting two- and three-year maturities is a short-term financing solution and means the Treasury will probably need to keep increasing auction sizes going forward, Stephen Stanley, chief economist at Amherst Pierpont Securities LLC, said in a note.

“This gets issuance up quickly and will fix this year’s problem, but in 2 to 3 years’ time, when the funding gap is projected to be at least as large as it is today, the bulk of the hikes announced today will roll off,” Stanley said. “So, at that point, to increase net issuance, Treasury would have to boost auction sizes yet again.”

The changes will result in an additional $42 billion of new issuance for the upcoming quarter. Auctions sizes of Treasury Inflation Protected Securities will remain unchanged over the three-month period.

‘Borrowing Needs’

“Treasury anticipates these changes will stabilize the weighted-average maturity (WAM) of the debt outstanding at or around current levels, notwithstanding large, unexpected changes to borrowing needs,” it said in the statement.

Before Wednesday’s refunding announcement, most primary dealers indicated they expected Treasury would boost some coupon-bearing debt auction sizes in what was seen as an inflection point to rising issuance that will ultimately spread to all tenors. Dealers forecast new issuance in 2018 to at least double this year to more than $1 trillion, the most since 2010.

A big chunk of the new supply over the year will also come through more bill sales, yet that may be temporarily stymied as Treasury waits for lawmakers to hoist or suspend the debt limit again. Mnuchin said Tuesday that extraordinary measures he’s been using to stay under the suspension will last through the end of February. The Treasury statement reiterated the end-February date as well.

Budget Deficit

The U.S. posted its largest budget deficit since 2013 in the fiscal year that ended in September. While President Donald Trump’s administration says the tax bill will stimulate enough economic growth to cover lost revenue, Congress’s tax scorekeeper estimates the changes will raise deficits by more than $1 trillion over the next decade.

Treasury could not say how much of the debt issuance increase was a result of new tax cuts widening deficits. “The administration’s updated budget forecast is not available yet,” Clay Berry, deputy assistant secretary for capital markets, said during a press conference. The White House is expected to release those forecasts with its budget on Feb. 12. “Our fiscal needs have obviously increased and it’s due to a number of factors,” Berry said.

The central bank began reducing its holdings of Treasury in October and is currently allowing up to $12 billion of the debt to roll off per month. The caps are gradually increased through time to a maximum of $30 billion by October 2018.

The central bank purchases Treasuries through non-competitive bids submitted alongside the government’s auctions. These Fed purchases, known as add-ons, do not affect the size of the auctions, so any reduction in the Fed’s demand has to be made up by Treasury.

Data Investigation

The Treasury on Wednesday discussed its investigation on the topic of the department’s trading data -- which is now being used only by regulators -- being released to the public.

“Treasury is actively considering a policy on the public dissemination of Treasury securities transactions data,” the department said in their statement. “Treasury officials are currently seeking input from a wide range of market participants and other stakeholders.”

Treasury said over the next three months it plans to issue a call for a large-position report, without disclosing any more details. The last time the department conducted such a request for details on the positioning of market participants was in June 2016.

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