Treasury refunding preview
|Summary
We do not anticipate any major surprises in the July 31 Treasury refunding announcement. We expect coupon auction sizes to remain unchanged for the second consecutive quarter.
The federal budget deficit is tracking somewhat wider relative to our expectations at the last refunding on May 1. We forecast a budget deficit of $1.85 trillion in fiscal year (FY) 2024 and $1.95 trillion FY 2025. That said, the overarching story has not changed materially. The federal budget deficit is running on trend at roughly 6.5% of GDP, about two percentage points larger than its pre-pandemic level.
A slowdown in the Federal Reserve's quantitative tightening program has helped keep growth in Treasury's financing need in check. Starting in June, the Federal Reserve reduced the cap on monthly balance sheet runoff for Treasury securities from $60 billion per month to $25 billion. The Federal Reserve reinvests the proceeds of maturities in excess of $25 billion, eliminating the need for Treasury to raise that money from private investors.
We project net T-bill issuance of $286 billion in Q3 and $32 billion in Q4. If realized, this would bring net T-bill issuance up to $430 billion for 2024.
One development we will be looking for on July 31 is guidance from Treasury on the debt ceiling. The debt ceiling is currently suspended, and absent Congressional action it will be reinstated on January 2, 2025. During some previous debt ceiling suspension episodes, Treasury felt legally obligated to reduce its cash balance down to the level that prevailed when the debt ceiling was last suspended. However, this was not the case during the last debt ceiling suspension in 2021.
We expect Treasury to maintain business as usual when it comes to running its cash balance in the $700-$800 billion range through year-end. If Treasury uses a different operating framework, say a $500 billion cash balance target at year-end, this would imply significantly more T-bill paydowns in November/December and more T-bill issuance in January/February than we currently have forecast.
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