The Treasury Department announced on Nov. 1 plans to bolster the size of bond sales to help manage the U.S. government’s increasing debt load and rising financing costs.
Officials revealed details of the department’s refunding efforts for future debt sales as many Treasury yields are trading at their highest levels in 16 years. Wall Street is beginning to pay closer attention to how the federal government is handling ballooning debt, deficits, and interest rates, which could inflict fiscal damage on the public purse.
The Treasury will begin by auctioning $112 billion in debt next week to refund a little more than $102 billion of notes scheduled to mature on Nov. 15. This event is expected to raise approximately $9 billion in additional funding.
According to the announcement, the bond sale will be a three-act event: $48 billion in three-year notes, $40 billion in 10-year notes, and $24 billion in 30-year Treasurys.
The Treasury also anticipates bolstering the sizes of two- and five-year notes by $3 billion per month and the three-year note by $2 billion per month. The department plans to expand sales of the seven-year note by $1 billion per month.
The Treasury aims to expand the auction size of multiple maturities and place an emphasis on coupon-bearing bonds and notes.
Overall, officials intend to raise money by focusing on short-term bonds. This signals that the Treasury is “banking on rates coming down,” according to Heritage Foundation economist E.J. Antoni.
“So, what happens if ‘higher for longer’ isn’t ’transitory'...?” he asked on X, formerly known as Twitter.
Federal Reserve leaders have signaled that interest rates will be higher for longer than initially anticipated since the annual inflation rate won’t return to the institution’s 2 percent target until 2025. According to the Federal Reserve’s Summary of Economic Projections, rate cuts aren’t expected to be realized until the end of 2024. A recent CNBC Fed Survey suggests that economists, strategists, and market analysts don’t anticipate an easing monetary policy climate until next year’s third quarter.
The chief challenge for the Treasury will be weakening investor demand, sparking market anxiety over America’s fiscal condition.
“Demand for US Treasuries may have softened among several traditional buyers,” the Borrowing Advisory Committee said in a separate report. “Bank security portfolio assets have been declining since last year with bank holdings of Treasurys down $154 billion compared to one year ago. The appreciation of the U.S. dollar means some foreign central banks may consider liquidating Treasury securities in the process of defending their currencies.”
Over the past month, there has been lackluster interest from domestic and foreign buyers for a plethora of bonds and notes, including the two-, seven-, (benchmark) 10-, 20-, and 30-year Treasury securities.
‘Spending Like Drunken Sailors’
The Treasury Department announced on Oct. 30 that the federal government’s borrowing needs will be slightly lower in the final three months of 2023.It estimated that the government will borrow $776 billion in the government’s first quarter, down from the previous quarter’s total debt sales of $1.01 trillion. This was also below the market estimate of $800 billion, with officials pointing to higher receipts for the decrease.
Looking ahead to the first three months of 2024, the Treasury projects that it'll borrow $816 billion, above Wall Street’s expectations of $698 billion.
This comes days after the U.S. government reported a $1.7 trillion budget deficit for the fiscal year 2023, up by 23 percent from the prior year.
Appearing before an event hosted by the Center for American Progress, former Treasury Secretary Larry Summers warned that the growing federal deficit “is probably a more serious problem than it ever has [been] before.”
Before employing a combination of spending cuts and tax hikes, Mr. Summers said that “we ought to be collecting taxes that are owed.”
“I see a kind of overwhelming evidence that by strengthening the work the IRS does, we can raise more tax revenue,” he said.
Mr. Summers’s comments come soon after House Republicans proposed trimming $14.3 billion in IRS funding and reallocating the funding to pay for military aid to Israel.
While requests to offset the costs of new emergency spending are “welcome news,” the House GOP’s supplemental bill would add to the federal deficit, according to Maya MacGuineas, president of the Committee for a Responsible Federal Budget.
“Paying for new spending by defunding tax enforcement is worse than not paying for it at all. Instead of costing $14 billion, the House bill will add upward of $30 billion to the debt. Instead of avoiding new borrowing, this plan doubles down on it,” Ms. MacGuineas said in a statement. “Getting into the habit of offsetting the costs of new spending and tax cuts is critical given our fiscal situation. But you can’t pay for borrowing with more borrowing.”
Billionaire investor Stanley Druckenmiller believes that the federal government will need to make some tough decisions in the future after “spending like drunken sailors” and failing to issue new debt at lower interest rates.
“Don’t forget pre-COVID, the federal government was 20 percent of GDP [gross domestic product] in spending. Now it’s 25 percent of GDP. My father told me, ‘If you’re in a hole, stop digging, Stan,'” Mr. Druckenmiller said during an interview with CNBC’s “Squawk Box” on Nov. 1.
The eminent investor recommended cuts to government entitlement programs, such as Social Security benefits, because they account for more than half of the federal budget.
“I want to go after entitlements. It’s where the money is,” he told the business news network. “This generation has got to take a cut. Right now, current seniors, you’re going to get 100 cents on the dollar. Future seniors looking at five or 10 cents on the dollar, is it not unreasonable for us to go to 85 or 90 cents on the dollar?”
In October, the national debt surged by more than $233 billion to above $33.675 trillion.
