The US National Debt Has Exceeded The Total Value Of The GDP (#GotBitcoin?)
The U.S. national debt now exceeds the size of America’s total gross domestic product and the milestone may have been met as early as June, according to a Friday New York Times report. The US National Debt Has Exceeded The Total Value Of The GDP (#GotBitcoin?)
America’s federal debt stands at around $26.6 trillion — an approximate $7 trillion increase since 2016, according to fiscal data from the Treasury Department. Total U.S. GDP was just over $19.4 trillion at the end of June, according to a July 30 release from the U.S. Bureau of Economic Analysis.
Financial pitfalls in the last few months can be blamed on the coronavirus pandemic, according to the Economic Policy Institute. COVID-19 is largely responsible for the GDP to deficit ratio, joblessness and reduction of income, EPI reported.
GDP decreased 3.4% in the first quarter of 2020 and is projected to fall another 34.3% in the second quarter, according to BEA.
The U.S. government under the direction of President Donald Trump spent roughly $2.4 trillion on the first stimulus package in April, which granted over 90 million Americans a check for $1,200, according to USA Today. The Federal Reserve contributed another $4 trillion in efforts to combat the economic effects of the virus, the Washington Post reported.
The rising government spending doesn’t seem to concern some experts and the public.
“At this stage, I think, nobody is very worried about debt,” a senior fellow at the Peterson Institute for International Economics Olivier Blanchard told the New York Times. “It’s clear that we can probably go where we are going, which is debt ratios above 100 percent in many countries. And that’s not the end of the world.”
Around 47% of adults think the rising deficit is highly problematic, which is a substantial reduction from 55% who were wary of the spending in 2018, according to Pew Research Center. Approximately 58% of Americans call the pandemic a “very big problem,” Pew reported.
Some experts, despite the rising debt, insist the U.S. government has enough “room” for yet another stimulus package, according to the Times. (RELATED: National Debt Reaches $25 Trillion Following Coronavirus Relief Spending)
“What’s very clear is that the U.S. economy has some room,” global chief investment officer of fixed income at BlackRock, an investment firm, Rick Rieder said. “I would argue that we still have room now for another fiscal package.”
Trumponomics Lifts Government Debt To WWII Levels—Cutting It Won’t Be Easy
Advanced economies no longer benefit from rapid economic and population growth of postwar period.
As countries world-wide boost spending to battle the new coronavirus, government debt has soared to levels not seen since World War II.
Among advanced economies, debt rose to 128% of global gross domestic product as of July, according to the International Monetary Fund. In 1946, it came to 124%.
For now, governments shouldn’t worry about mounting debt and instead focus on bringing the virus under control, said Glenn Hubbard, chairman of the Council of Economic Advisers under President George W. Bush.
“The war analogy is exactly the right one,” said Mr. Hubbard, dean emeritus of Columbia University’s Graduate School of Business. “We were and are fighting a war. It’s a virus, not a foreign power, but the level of spending isn’t the problem.”
After World War II, advanced economies brought down debt quickly, thanks in large part to rapid economic growth. The ratio of debt to GDP fell by more than half, to less than 50%, by 1959. It is likely to be harder this time, for reasons involving demographics, technology and slower growth.
In the optimistic era after the war, birthrates boomed, leading to gains in household formation and growing workforces. Circumstances were ripe to reap the benefits of electrification, suburbanization and improved medicine.
Through the late 1950s, economies soared. Growth averaged around 5% a year in France and Canada, almost 6% in Italy and more than 8% in Germany and Japan. The U.S. economy grew almost 4% a year.
“We’d be lucky to have half that over the next decade,” said Nathan Sheets, a former undersecretary of the Treasury for international affairs and now chief economist at PGIM Fixed Income, the investment-management business of Prudential Financial Inc.
In recent years, the U.S., U.K. and Germany have grown about 2% a year. In Japan and France, it has been closer to 1%. Italy has barely grown at all.
Though vanquishing the virus could bring a surge of optimism, the post-World War II boom would be difficult to re-create. Population growth has slowed in advanced economies, the workforce is shrinking as societies age and productivity is slowing.
By the early 1960s, the Group of Seven advanced economies all had population growth of nearly 1% a year or more. Today, no G-7 country has population growth of 1%, and Japan and Italy are shrinking.
Rapid economic growth and lower military spending in the postwar years made it easy to reduce debt. In the U.S., federal outlays fell by more than half between 1945 and 1947, not accounting for the effects of growth or inflation.
The end of the various pandemic-era programs, such as extended unemployment benefits and direct payments to households would reduce spending, but not by as much as the end of World War II.
“Can we avoid letting the exploding spending during the war, not turn into massive expanded social spending going forward?” asked Mr. Hubbard.
Today’s high levels of debt didn’t start with the pandemic. Since the 1980s, even outside of recessions, debt has grown in the U.S., Europe and Japan, driven largely by spending on health care and pensions.
After the war, as advanced economies reduced wage and price controls, a burst of inflation helped lower the debt. Today, there is no inflation in sight, despite massive stimulus spending.
Low interest rates are a common feature of both periods. After World War II, the Federal Reserve kept borrowing costs low to reduce the government’s interest costs.
Today, there is no formal collaboration between the Treasury and the Fed. But with a backdrop of low growth, a damaged labor market and low inflation, most central bankers view an extended period of ultra low rates as appropriate.
By default, if not by design, advanced economies might end up accepting a world of much higher government debt.
Central banks have bought huge quantities of government debt to bring down long-term interest rates and shore up growth in periods of weakness. That has reduced the amount of government securities held by the public, and the interest paid on this debt is largely remitted back to the government.
Over $4 trillion of the $26 trillion in U.S. debt is held by the Fed. Japan’s central bank owns over $4 trillion worth of its government liabilities, an even larger share of the country’s roughly $11 trillion in outstanding debt.
The example of Japan has shown that debts can rise for a long time, well above 200% of GDP, without sparking a fiscal crisis.
By having central banks own so much debt, some of the risks and challenges of debt management are shifted from the Treasury or finance ministry to central banks, economists say.
“My expectation is central banks will be successful, but it does pose challenges,” said Mr. Sheets, who formerly headed the Fed’s international-finance division. “Whenever you’re in such unfamiliar terrain, there’s always the risk of something possibly going wrong. It is a generational question that we’ll struggle with for some time to come.”
U.S. Debt Is Set to Exceed Size of the Economy Next Year, a First Since World War II
Coronavirus spending, shrinking GDP and tax-revenue decline push government toward milestone.
U.S. debt has reached its highest level compared to the size of the economy since World War II and is projected to exceed it next year, the result of a giant fiscal response to the coronavirus pandemic.
The Congressional Budget Office said Wednesday that federal debt held by the public is projected to reach or exceed 100% of U.S. gross domestic product, the broadest measure of U.S. economic output, in the fiscal year that begins on Oct. 1.
That would put the U.S. in the company of a handful of nations with debt loads that exceed their economies, including Japan, Italy and Greece.
This year the ratio is expected to be 98%, also the highest since World War II.
The surge in borrowing so far isn’t creating angst among investors or hampering the U.S.’s ability to borrow more. Investors have gobbled up U.S. Treasury assets, drawn to their relative safety. Moreover, interest rates are expected to remain low, suggesting the government still has plenty of room to borrow.
The yield on the benchmark 10-year U.S. Treasury fell Wednesday to 0.643%, from 0.672%, in line with a broader rally in financial markets. Bond yields fall as prices rise.
The U.S. passed the 100% debt-to-GDP mark, measured on a quarterly basis, in the April to June quarter, when government spending surged to combat the new coronavirus and tax revenue plunged. But this would be the first time in more than 70 years for it to do so for the federal government’s full fiscal year.
The last time the U.S. debt level exceeded economic output was in 1946, when it stood at 106% after years of financing military operations to help end World War II.
Policy makers have compared the fight against the coronavirus to a military war effort, and approved roughly $2.7 trillion in spending since March for testing and vaccine research, aid for hospitals and economic relief for businesses, households and state and local governments.
Federal revenue fell 10% from April through July, compared with a year earlier, as fears of the virus and widespread business shutdowns brought economic activity to a standstill, and firms laid off millions of workers.
The combination of those factors sent the federal deficit soaring and caused government debt as a share of economic output to jump.
By the end of June, total debt had swelled to $20.5 trillion from $17.7 trillion at the end of March, a 16% increase over just three months, according to Treasury Department data. Meanwhile, the economy shrank 9.5% in the second quarter, bringing debt as a share of GDP to 105.5%, compared with 82% in the first quarter.
“It was a massive rise in borrowing and quite shocking, but incredibly effective,” said former CBO chief economist Wendy Edelberg, who in June became director of the Hamilton Project, a think tank affiliated with the Brookings Institution.
“On the flip side, this is exactly why we, as a country, want to have room to increase borrowing during times of emergency.”
Although the economy contracted sharply in the second quarter, the decline would have been much worse if not for the historic fiscal support, economists say. The spending propped up incomes through stimulus checks for households, enhanced jobless benefits and emergency small-business loans.
Net interest costs on the debt have declined 12% during the first 10 months of the fiscal year compared with the same period a year earlier, despite rising red ink. CBO said Wednesday that it expects interest cost to be lower over the next decade than it forecast before the pandemic.
“There’s no economic difference between a ratio of 99% and a ratio of 101%,” Ms. Edelberg said. A more useful measure of the country’s fiscal health is its debt-to-GDP trajectory, she added.
CBO projects those measures will add little to the deficit over the next 10 years, because they are entirely offset by low inflation and very low interest rates. Wednesday’s estimate said the deficit would grow by $13 trillion over the next decade, compared to March’s $13.1 trillion projection.
The mounting U.S. debt load is at the center of a debate in Congress over how much additional relief the government can afford to provide to households and businesses hit by the pandemic.
Cutting the size of the nation’s debt hasn’t in recent years been a priority of lawmakers in either political party—a factor that facilitated bipartisan support for earlier pandemic stimulus packages. The latest effort is testing the limits on lawmakers’ willingness to spend, however.
Democrats have pushed for a broad-based, $3.5 trillion relief package, while the White House and Senate GOP have sought to cap the bill at $1 trillion. Some Republicans have argued against any additional relief measures at all.
After World War II, federal debt levels remained relatively stable for years and a booming 1950s economy helped cut the debt-to-GDP ratio in half, to 54%, by the end of the decade. That isn’t expected to happen this time.
Deficits and debt were already projected to rise over the coming decades as an aging population pushes up the costs of Social Security and Medicare.
In the years before the virus, Congress also approved a handful of measures that widened the budget gap, including two bipartisan budget deals that lifted government spending above previously enacted caps and a Republican tax cut that has constrained revenues.
While debt has risen in most advanced economies, the U.S. is the only country whose debt-to-GDP ratio is expected to continue rising after 2021, according to the International Monetary Fund’s Fiscal Monitor Report.
It is also expected to record the biggest jump in debt-to-GDP this year among advanced economies, including Germany, France, Italy and the U.K.
“In the short term you have to spend what it takes to minimize the recession and keep the economy afloat,” said Brian Riedl, a senior fellow at the conservative Manhattan Institute for Policy Research. “But the soaring debt to GDP ratio is totally unsustainable, even if interest rates remain low.”
Interest costs are expected to eat up a larger share of the federal budget, topping out at $1 trillion a year by the end of the next decade, Mr. Riedl estimates.
The larger the debt grows, the more sensitive it becomes to even small shifts in interest rates, and the more likely it is to crowd out private investment, he added.
House Speaker Nancy Pelosi said last week that Democrats would be willing to accept a $2.2 trillion relief package, but the talks remained at an impasse as Senate Republicans prepared to introduce legislation after they return from their August recess next week.
Federal Reserve Chairman Jerome Powell and some economists have said Congress needs to do more to support the nascent recovery, especially with unemployment in double digits and the virus continuing to spread throughout the country.
The pandemic has forced many states to alter reopening plans and could temper the economic rebound expected this summer.
“I think we’re going to continue to see the U.S. economy recover,” Tyler Goodspeed, the acting chairman of President Trump’s Council of Economic Advisers, said at a press briefing last month. “It would recover a lot faster, and with much less long-term scarring, with additional support.”
Banks Pile Into Treasurys, Helping To Fund Government Borrowing Spree
Demand from banks and money-market funds helps absorb the flood of new debt.
Surging deposits and declining lending are driving banks to dramatically increase their holdings of U.S. Treasurys, offering significant support to the bond market at a time of massive government borrowing.
Holdings at U.S. commercial banks of Treasury and agency securities other than mortgage bonds have grown by more than $250 billion since the end of February as their total deposits have jumped by more than $2 trillion, according to Federal Reserve data. Commercial and industrial loans initially spiked as companies drew on their credit facilities, but many have since repaid bank debt and loan-and-lease volume has fallen.
Analysts say the surge in deposits has been driven by several factors, including government stimulus programs and the cautious behavior of many individuals and businesses in the midst of a pandemic. Banks, meanwhile, have been less willing to lend because they are nervous about the economic outlook, giving them more cash to invest in assets like Treasurys.
Larger factors also are helping drag down Treasury yields, which fall when bond prices rise. Inflation has been low for years, investors want a safe place to put their money, and the Federal Reserve has been both buying bonds and promising near-zero short-term interest rates for years to come.
Even so, demand from banks and other sources like money-market funds has played a critical role, analysts say, allowing the government to issue more than $3 trillion in debt since February without pushing yields significantly higher, as some had feared. The yield on the benchmark 10-year note settled Friday at 0.694%, down from 1.909% at the end of 2019.
Investors’ appetite for Treasurys will be further tested this week as the government lines up another $155 billion of new note auctions. Traders will also be watching Fed Chairman Jerome Powell’s appearance before congressional panels on Wednesday and Thursday, and keeping an eye on stocks after major indexes posted their third straight week of declines.
“The bank accumulation of Treasurys has very much helped finance the higher deficit needs of the government,” said Mark Cabana, head of U.S. interest rate strategy at Bank of America.
Banks typically buy Treasurys in the one- to five-year maturity range, analysts said. Longer-term bonds are generally less appealing because they are more volatile, while shorter-term debt barely offers more interest than what banks can get from their own reserve accounts at the Fed.
Money-market funds have also received huge inflows as many investors have moved out of riskier investments and into cash. Most of that has gone into government money-market funds, which invest only in Treasurys and other government-backed securities.
But managers of prime money-market funds, which can buy a wider range of short-term debt, also have increased their holdings of government debt. Together both types of money-market funds have lifted their holdings of short-term Treasury bills, which carry maturities of up to one year, by more than $1.3 trillion since the end of February.
So much cash flooded into these funds that, for a short time before the Treasury started issuing new debt, yields on Treasury bills actually went negative. Some government money-market funds, such as ones run by Fidelity Investments, stopped taking money from new investors because of concerns about where they could invest it.
Blake Gwinn, head of front-end rates strategy at NatWest Markets, said money-market funds’ need for short-term bills has helped keep yields in a tight range even as the Treasury began to pump out new bills. These securities made up $2.5 trillion of the $3.3 trillion net Treasury issuance between the end of February and the end of August.
Banks and money-market funds have been so important that some have started wondering how the market would respond if either source of demand became less reliable. Bank lending, for example, is expected to increase as the economy improves, likely supplanting some bond purchases. Investors also tend to pull cash from money-market funds once they move on from major market shocks—a pattern that has shown signs of repeating recently.
“There certainly is a risk that you do see continued outflows from money-market funds,” Mr. Cabana said. Similarly, he said, there are indications that bank deposits, excluding reserves, are leveling out and “as long as that’s the case, it does raise the risk of higher overall Treasury rates.
Still, most analysts, including Mr. Cabana, aren’t that concerned yet. One reason: The Fed has helped drive up deposits by buying both Treasurys and agency mortgage securities, currently at a pace of $120 billion a month. Those purchases essentially pump money into the economy, which finds its way into deposits. If the Fed repeats its playbook from the aftermath of the 2008-09 financial crisis, it could be years before it stops accumulating more bonds, let alone reduces its holdings.
Yields on very short-term bonds should also be constrained by interest rates explicitly set by the Fed. Some banks may not want to buy bonds that yield only 0.01 percentage point more than the yield on their central bank deposits, but they would jump at the chance to buy bonds offering an extra 0.08 percentage-point yield, said Jon Hill, an interest rate strategist at BMO Capital Markets.
Some analysts say the Treasury will increasingly want to replace short-term bills with longer-term bonds to provide the government with more stable financing. That entails appealing to foreign investors, whose taste for U.S. Treasurys has diminished in recent years, as well as traditional asset managers.
One concern: Some investors have begun to question whether government bonds still play their traditional role as a natural hedge against stock markets. Historically, bond prices have risen—and yields have fallen—as share prices decline. With yields already so low, that traditional relationship hasn’t worked consistently, and it broke down completely during March’s selloff of everything.
“There is some doubt over Treasurys’ usefulness as a hedge against riskier assets now,” said Andrey Kuznetsov, senior credit portfolio manager, at the international business of Federated Hermes. “It seems more likely that we’ll see some market indigestion with more longer-maturity Treasury supply.”
Get Ready For An Eye-Popping U.S. GDP Number
Estimates are that the economy grew 30% in the third quarter, a postwar record.
Two things explain the economy’s rebound. States ended the general shutdowns that squelched growth in the second quarter. And Congress and the Federal Reserve came to the rescue with unprecedented fiscal and monetary relief.
Expectations that the recovery will continue rest on a couple of key assumptions: that states are unlikely to reimpose widespread lockdowns even if cases continue to rise, and that Congress is likely to enact fresh coronavirus relief either before or after the Nov. 3 election.
The Covid-19 pandemic caused the deepest U.S. recession since at least World War II. Gross domestic product shrank at an annual rate of 31.4% in the second quarter. Covid-19 is infecting more than 50,000 Americans a day, the most since early August.
Somehow, though, the economy has roared back. On Oct. 29, according to economists surveyed by Bloomberg, the government is likely to report that GDP rose an annualized 30% in the third quarter—also a postwar record. These graphics portray a recovery that’s incomplete yet remarkable.
Fears that a resurgence of the virus would cause the economy to lapse back into recession are fading. Economists polled by Bloomberg predict slightly stronger-than-normal GDP growth for the current quarter and all of 2021.
That should cause the unemployment rate—which peaked at 13% in June—to drift down to about 6% by the end of 2021, the median prediction in the Bloomberg survey. Women’s participation in the labor force plunged in April, possibly because mothers dropped out to care for kids when schools closed, but has partially recovered.
Although consumers of all income levels express discomfort about economic conditions, their spending has risen for four straight months (though it’s still down from a year earlier). The savings rate, which jumped in the spring when people were cooped up at home, has fallen now that they are out and about.
Most impressive is the strength of housing, fueled partly by the lowest mortgage rates in history. The National Association of Home Builders announced on Oct. 19 that its monthly index of builder sentiment was the highest since the index was introduced in 1985.
What’s good for the consumer is good for business. Commercial and noncommercial bankruptcy filings are both down from a year ago. The Federal Reserve’s index of manufacturing activity has rebounded, though it’s still 6% below a year ago.
Chief financial officers are more optimistic about their companies’ prospects now than they were during the 2007-09 recession, according to a survey conducted by Duke University’s Fuqua School of Business.
That’s not to say all is well. In late September, according to the Census Bureau, about 2.5 million families with children that had been food-sufficient in March, before the pandemic, didn’t have enough to eat sometimes or often in the preceding week. And families have been falling out of the middle class as Congress fails to renew coronavirus relief. But compared to the second quarter, the U.S. economy has come a long way back.
U.S. Still Faces Uncertain Borrowing Needs Due To Covid-19, Treasury Says
Advisory committee urges Congress to suspend debt ceiling before July deadline.
The Treasury Department on Wednesday announced few changes to its regular debt issuance schedule for the current quarter, while emphasizing the government continues to face uncertain and sizable borrowing needs due to the coronavirus pandemic.
The agency intends to maintain the size of nominal coupon auction sizes this quarter, after ramping up auction sizes last year to accommodate a surge in government spending to combat the pandemic and cushion the U.S. economy.
“Treasury believes that these changes have created sufficient capacity to address near-term projected borrowing needs,” said Brian Smith, the Treasury’s deputy assistant secretary for federal finance, in a statement on the agency’s quarterly borrowing needs.
The Treasury also will continue to gradually increase auction sizes for Treasury inflation-protected securities, as announced in November, boosting the size of those auctions by $10 billion to $20 billion over the 2021 calendar year.
The borrowing plans are consistent with expectations from the vast majority of primary dealers and recommendations from a Treasury borrowing advisory committee, a senior Treasury official said Wednesday morning.
The plans also preserve flexibility for Treasury, in light of potential uncertainty about government spending and the possibility for another economic relief package in Congress, the official said.
The Treasury said earlier this week the government intends to borrow less in the coming quarter than previously estimated, in part because it started the year with much more cash than expected.
Agency officials had assumed government spending would pick up late last year after Congress passed another economic relief package, but a deal over the measure came late in December, and much of the spending has now shifted to this year.
The Treasury also intends to draw down its large cash balance—which totaled $1.7 trillion at the end of December—over the coming quarters, as the government approaches a key deadline for its borrowing limit.
Mr. Smith in his statement Wednesday said the government would continue to take a cautious approach to its cash balance, and said the path or extent of any decline would depend on the pace of government spending and the possibility of another coronavirus relief package.
Congress suspended the limit, or debt ceiling, until July 31, 2021, after which time the Treasury will be unable to tap bond markets to raise new cash. A Treasury borrowing advisory committee strongly urged Congress to suspend the borrowing limit before the July deadline.
U.S. Plans Record Debt Sale; No Big Changes Before New Stimulus
The U.S. Treasury held steady its planned issuance of longer-dated securities at a quarterly debt auction next week as the department awaits the result of the Biden administration’s push for a fresh coronavirus relief package.
The Treasury already boosted its so-called quarterly refundings in each of the last three quarters, and its stockpile of cash remains near an all-time high. With the outcome of President Joe Biden’s push for a $1.9 trillion stimulus bill uncertain, the department held off on tweaking its issuance of longer-dated securities.
Officials followed through on plans detailed in November to lift auctions of inflation-linked securities this year. The Treasury also said it will reduce bill issuance, which surged as it rushed to fund pandemic-related spending. The aim now is to bring the share of bills in the nation’s debt back toward historic norms.
The Treasury Will Sell $126 Billion In Long-Term Debt Next Week, Broken Down As Follows:
* $58 Billion Of Three-Year Notes On Feb. 9, Unchanged From January But $4 Billion More Than November
* $41 Billion Of 10-Year Notes On Feb. 10, The Same As Last Quarter
* $27 Billion Of 30-Year Bonds On Feb. 11, Unchanged Versus November
The total amounts to $126 billion, or $4 billion more than the November refunding — a new record, thanks to moves the past two months boosting three-year note auctions.
The Refunding Will Raise $63.1 Billion In New Cash
The debt management team also said it won’t be expanding sales of any other tenors of nominal coupon-bearing debt over the quarter. Officials didn’t specify the amount by which bill supply will fall over the period. In August, the Treasury Borrowing Advisory Committee recommended allowing the share of T-bills to fall gradually to a range of 15% to 20% of outstanding debt — compared with nearly 24% now.
The majority of Wall Street bond dealers had predicted the Treasury would make no changes to nominal coupon-bearing debt auctions. Yet, given the reprieve from the onslaught of ever increasing long-term debt supply, the yield curve did flatten slightly after the announcement. The gap between five- and 30-year yields narrowed briefly, before widening back to the widest since 2016. The spread was about 144.9 basis points at 2:02 p.m. New York time.
The Treasury pushed forward with the initiative it started in January to increase sales of Treasury Inflation-Protected Securities compared with last year’s auction sizes:
* It Will Lift By $1 Billion The Size Of The February 30-Year New-Issue Tips Auction
* The 10-Year Tips Reopening Also Rises By $1 Billion
* The Five-Year New-Issue Tips Sale In April Also Climbs By $1 Billion
The department held off on making a decision on debt linked to the Secured Overnight Financing Rate, the heir presumptive to Libor as a benchmark for short-term dollar lending rates. The government has been analyzing the idea for months, and said Wednesday it “continues to actively explore the possibility” of SOFR-linked issuance.
Meantime, the Treasury is following through on expanded floating-rate note sales, after boosting its new-issue FRN last month by $2 billion. The reopenings planned for February and March will also rise by $2 billion each, bringing them to $26 billion per auction. No other FRN changes were announced.
On Monday, the Treasury as part of its quarterly borrowing estimates said it would reduce its cash balance to $800 billion by the end of March and to $500 billion by June, from about $1.6 trillion now.
The Treasury in 2015 instituted a policy of keeping the equivalent of at least five days’ worth of expenditures, or a minimum of $150 billion, in the cash account in case unexpected disruptions locked it out of debt markets. Before that, the Treasury kept enough cash for just two days. As budget deficits had begun to soar even prior to the pandemic, so has the size of the cash buffer.
Brian Smith, the Treasury’s deputy assistant secretary for federal finance, told reporters Wednesday that the 2015 cash-balance policy “still holds.”
“We are still looking to make sure we can meet any outflows in the case of a market disruption — generally targeting a week of outflows,” Smith told reporters. “It’s really the size of uncertainty related to the Covid-19 outbreak that has changed the situation” for now.
That cash balance will be drawn down over coming months in part by trimming bill issuance. The Treasury said it’s modifying the “cadence” of its shortest-dated securities, called cash management bills, or CMBs.
* The 15-Week And 22-Week Cmbs Will Cease After Settlement On Feb. 16
* The Six-Week And 17-Week Cmbs Will Continue At Least Through April
* Other Bill Auctions Could Be Boosted Given The Changes In Cmb Sales
Cutting the cash balance also gets the government ready for the risk of a protracted battle over the debt limit, with the current suspension set to expire at the end of July. By law, the Treasury has to shrink its cash to the level when the suspension was put in place, back in 2019.
“The debt ceiling looms large,” Zachary Griffiths, a rates strategist at Wells Fargo wrote in a note with his colleagues on Wednesday. Getting the cash balance down to the mandated level of roughly $120 billion “will be particularly challenging,” the group wrote.
U.S. Treasury To Auction Record $126 Billion Next Week In Refunding, Up $4 Billion From Last Quarter
Treasury refunding increases by $4 billion.
The Refunding: As part of its regular quarterly refunding, Treasury announced it would sell $126 billion in notes and bonds next week. That’s up from $122 billion last quarter.
The department will issue $58 billion of 3-year Treasury notes TMUBMUSD03Y, 0.196% on Feb.9, $41 billion of 10-year notes TMUBMUSD10Y, 1.148% on Feb. 10, and $27 billion of 30-year bonds TMUBMUSD30Y, 1.937% on Feb. 11.
Big picture: The Treasury kept the size of its nominal bond and note auctions steady as the Biden administration and Democratic lawmakers pressed hard for its $1.9 trillion fiscal relief bill.
Before the refunding announcement, it was unclear if the Treasury should trim the size of its bond auctions as the Treasury’s pared-down borrowing estimates, issued on Monday, did not take into account the possibility of Congress passing future fiscal aid packages, which would spur additional debt issuance.
Given the uncertainty of how much further fiscal relief could arrive from Washington, market participants had argued the Treasury would maintain its record auction sizes to retain flexibility.
Tweaks to the upcoming auction cycle were made to sales of floating-rate notes and Treasury inflation-protected securities.
The Treasury also said it would instead rely on the issuance of short-term bills to finance any unexpected changes in borrowing.
Increase in auction of floating-rate notes: The Treasury said it would increase the size of its two auctions of floating-rate notes on February and March by $2 billion to $26 billion each.
Increase in inflation-indexed securities: Treasury said it will gradually increase the size of the TIPS auction sizes by $1 billion each in the January, February, March and April sales.
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