Treasury refunding preview
|Summary
We do not anticipate any major policy shifts from the U.S. Treasury at its upcoming quarterly refunding announcement on October 30. We expect coupon auction sizes to remain unchanged for the third consecutive quarter.
Fiscal year (FY) 2024 concluded on September 30, and the federal government ran a budget deficit of roughly $1.8 trillion for the year. Looking ahead to FY 2025, we project the budget deficit will widen to $1.9 trillion. A new Congress and president could shake up the fiscal outlook, but we suspect any big changes to the federal budget would not be felt until FY 2026.
The end of the Federal Reserve's quantitative tightening program is slowly coming into view, and this should help keep growth in Treasury's financing need in check over the next year or so.
The return of the debt ceiling adds another wrinkle to the borrowing outlook. The debt ceiling has been suspended since June 2023, and it will be reinstated on January 2, 2025. It is still a little too early for precise estimates of the "X date," or the date on which the Treasury would be unable to meet all of its obligations. That said, our preliminary read is that the timeline next year would look similar to what occurred in 2023, when the "X date" appeared to be sometime in the first half of June.
Given these factors, we are skeptical that coupon auction sizes will increase in the first half of next year. We suspect it will be August 2025 at the earliest before coupon auction sizes start to grow again.
In the near-term, we expect net T-bill supply to be roughly $50 billion in the current quarter. We project approximately $500 billion of net T-bill issuance in Q1-2025 followed by a $330 billion reduction in T-bills outstanding in Q2 for a total projected net increase in the first half of next year of $170 billion. These projections are conditional on the assumption that the debt ceiling is increased or suspended at some point in the next three to four months. If the debt ceiling is a binding constraint into the summer, much of the new bill supply we expect in the first half of next year will be pushed into the second half of the year.
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