US Treasury Announced 1 Trillion Dollars Borrowing Plan in Q3. What are the Implications?

The U.S. Department of the Treasury announced its current estimates of privately-held net marketable borrowing for the July – September 2023 and October – December 2023 quarters on July 31th. During the July – September 2023 quarter, the Treasury Department expects to borrow $1.007 trillion in privately-held net marketable debt. The borrowing estimate is $274 billion higher than announced in May 2023, primarily due to the lower beginning-of-quarter cash balance ($148 billion) and higher end-of-quarter cash balance ($50 billion), as well as projections of lower receipts and higher outlays ($83 billion).

That trillion number, while not as high as the record high during the COVID-19 crisis, would be well above pre-pandemic levels.

■ The Treasury Department received less taxes this year.

The treasury received less taxes in the fiscal year of 2023. Some of the revenue declines aren't a surprise because lawmakers have been on a tax-cutting spree. Half of US states cut personal or corporate income tax rates, and in many cases both, over the course of 2021 through 2023, according to the Center on Budget and Policy Priorities.

Some economists predict a recession may still hit the US economy, and higher unemployment would likely cause consumers to pull back, hurting tax revenue.

■ Bidenomics further boosts US fiscal burden

Since 2015, the federal government's spending to GDP ratio has increased from 20% to 25%. In recent years Biden administration proposed several plans to stimulate American job markets, infrastructure investment and manufacturing industry. These policies resulted in higher government outlays.

In the meanwhile, during the first nine months of the fiscal year, the rising yields have resulted in a substantial increase in the interest payments on the U.S. government debt.

■ The influence on the yields

Rising demand for public borrowing in turn has pushed up yields on government bonds, making them more expensive to issue. The Fed is also shrinking its holdings of Treasuries, obliging the government to sell more bonds to other buyers.

“Everyone knows the flood is coming,” said Gennadiy Goldberg, a strategist at TD Securities. “Yields will move higher because of this flood. Treasury bills will cheapen further.

■ Market volatility is likely to rise

The larger auction size will still raise the possibility of short-term market volatility. This has been seen in recent seven-year bond auctions, where buyers demanded deeper discounts to take up the securities.

According to Torsten Slok, the chief economist at Apollo Global Management, if there is an influx of Treasury bill issuance in addition to the existing quantitative tightening, we may experience turbulence in the upcoming months.

■ The influence for the commercial banks

Analysts fear scale of new issuance following debt ceiling fight will suck cash out of deposits in the commercial banks, which have already fallen this year as the rise in interest rates and the failure of regional lenders have sent customers seeking higher-yielding alternatives.

Further deposit flight and the rise in yields could in turn push banks to offer higher interest rates on savings accounts, which could be particularly costly for smaller lenders.

Doug Spratley, head of the cash management team at T Rowe Price, concurred that the Treasury’s return to borrowing “could exacerbate stresses that were already on the banking system”.