by Chris Black
In its latest quarterly Treasury Marketable Borrowing Estimates report (https://home.treasury.gov/news/press-releases/jy1851), released yesterday, the Treasury announced its current estimates of privately-held net marketable borrowing for Q423 and Q124, (the October-December 2023 and January-March 2024 quarters).
The amount of debt the Treasury expects to issue (https://home.treasury.gov/system/files/136/Sources_and_Uses_Oct_2023.pdf) this quarter is modestly lower, revised down from $852b to $776b, a drop of just $76b which the Treasury attributes (https://home.treasury.gov/news/press-releases/jy1851#ftn3:~:text=The%20borrowing%20estimate%20is%20%2476%20billion%20lower%20than%20announced%20in%20July%202023%2C%20largely%20due%20to%C2%A0projections%20of%20higher%20receipts%20somewhat%20offset%20by%20higher%20outlays) to “higher receipts somewhat offset by higher outlays.”
The Treasury’s forecast for debt issuance next quarter, in Jan-March ’24, is $816b, which would make it the third highest on record.
That, however, follows the $1.01t in new debt issued in the June-September quarter, which was the second busiest quarter for Treasury sales in history, runner-up only to the $2.8t in debt issued for COVID during the Q2 of 2020.
Combined, this adds up to $1.5 trillion in new debt for the current and next quarter, which is shown in the table above.
After borrowing $1 trillion in calendar Q3, the US is preparing to borrow another $1.5 trillion in Q423 and Q124, or a total of $2.5 trillion in 9 months of the calendar year.
Which means that for a full 12 month period, the US market debt needs will be about $3 trillion (that excludes the non-marketable borrowings which are also an increasingly staggering numbers).
The Treasury will publish a refunding statement tomorrow, where it schedules coupon Treasury sales, the same day the Fed makes an interest rate decision at FOMC.
I would argue that, for the first time ever, the refunding statement is more important (https://www.bloomberg.com/news/newsletters/2023-10-27/treasury-refunding-looms-larger-than-fed-for-nervous-bond-investors) than the FOMC.
Looking further out is where things get ugly.
As Goldman trader Jacob Gordon wrote last week “increasingly catching investors eyes is the surge in 2024 net (and certainly gross) government bond issuance, particularly in the US which is set to increase 60% year-over-year from $727 billion to $1.166 trillion net supply.”
Issuance is also set to increase in the UK and Europe by 26% and 21% respectively, and will also surge in China .
The 2024 debt onslaught would be the highest duration supply the market has seen since at least 2010.
The question becomes, with the lack of a foreign bid (foreign governments have not been significant marginal debt buyers (https://home.treasury.gov/system/files/221/TreasuryPresentationToTBACQ32023.pdf) in over a decade), what level of yield is attractive enough for households to term out their savings or sell down other assets (they own 39% of equities and buy USTs?
Recall that most households are maxed out (“households” does not mean literal households, but is a catch-all group including financial firms like hedge funds, pensions, private equity, etc.) or are at regulatory limits.
The Goldman trader then comments “the relentless UST issuance pressure is only going to increase quarter on quarter”, which means the bulk of the supply increases are still ahead of us!
Easing by Stealth
The rapid decline in the Fed’s RRP facility has not impacted financial conditions, but will provide a modest degree of easing in the coming months.
RRP balances have declined by almost $1.1t since June largely due to significant bill issuance, which financed a $800b increase in the Treasury General Account.
The balance of the decline went into commercial banks and vanished through QT.
With net bill issuance set to increase, the RRP may approach zero over the next year.
This will eventually lead to increases in bank reserve balances and non-bank deposit balances, which at the very least will ease bank funding conditions and may have a bullish effect on stock prices.
A rising level of reserve balances and deposits will likely modestly ease financial conditions in the coming months.
At a minimum, bank funding conditions will improve because banks will have more money on hand.
There may not be a strong mechanical linkage between quantities of “money” and financial conditions, but prices are in part psychological.
A wide range of market commentators perceive a connection between money supply and/or bank reserves with financial market prices.
There is even renewed interest (https://www.bis.org/publ/bisbull67.pdf) from the official sector in the connection between money supply and inflation.
This perception will give the eventual increase in reserves and deposits a loosening impact on financial conditions.
Out of The Fed
MMFs are conservative investors who largely invest in safe assets like bills and Treasury backed repo (they are cash lenders in Treasury repo, which includes lending to the Fed at the RRP).
The RRP had been the best option for them until June, when bill yields rose above the expected path of Fed policy.
SEC data (https://www.sec.gov/files/mmf-statistics-2023-09.pdf) show that MMFs increased their allocation to Treasuries from May to September month-end by $800b and correspondingly reduced their RRP investments.
This trend appears to have continued through the month of October.
Note that foreign central banks appear to have behaved similarly with their investments in the Foreign RP pool, a version of the RRP available to them.
Public data indicates that foreign central banks moved $100b out of the Foreign RP pool (https://fred.stlouisfed.org/series/WLRRAFOIAL) in same time-frame.
The decline in Fed reverse repo facilities is set to continue as net bill issuance will steadily increase (https://home.treasury.gov/system/files/221/TreasuryPresentationToTBACQ32023.pdf) in the coming months.
Treasury has already guided towards increasing (https://home.treasury.gov/news/press-releases/jy1670) the share of bills outstanding by 2.4%, which translates to an incremental $0.5t in net bill issuance.
This is without considering the potential for further upward adjustments to the share of bills outstanding.
At the moment, bill yields remain attractive relative to the expected path of policy and there is less front-end rate volatility due to a growing consensus that the rate hike cycle is peaking.
This suggests money funds (MMFs) and foreign central banks will continue to view bills as attractive and rotate out of Fed reverse repo into bills.
Fighting QT
Declining RRP balances will eventually overwhelm QT and lead to a net increase of money in the financial system.
After MMFs lend money to the Treasury, the money moves from the RRP to the Treasury General Account and then into the banking system through fiscal spending (which is why we indicated the January TGA drain was good for liquidity and stocks).
In our two-tiered monetary system , this mechanically increases reserves (money for banks) and deposits (money for non-banks) in a manner similar to QE (https://fedguy.com/the-qe-afterparty/).
However, the Fed’s QT program (https://fedguy.com/quantitative-tightening-step-by-step/) has also been pushing in the opposite direction and draining reserves at a rate of around $240b a quarter (https://fred.stlouisfed.org/series/WSHOSHO#0).
The interaction between the two forces has resulted in a modest increase in bank reserves. The relatively small increase of $150b since January despite a $1.2t decline (https://fred.stlouisfed.org/series/WLRRAL#:~:text=Notes%3A,the%20same%20price%20plus%20interest.) across both the RRP and Foreign RP pool is because much of the money has just been left in the TGA.
Further declines in the RRP will likely result in increases in reserves and deposits rather than increases in TGA balances.
The Treasury has been issuing debt and leaving the proceeds in the TGA as it sought to meet its December target balance of $750b (https://home.treasury.gov/system/files/221/TreasuryPresentationToTBACQ32023.pdf). The TGA balance has recently exceeded that target by $100b (https://fred.stlouisfed.org/series/WDTGAL), potentially in anticipation of $100b in war related spending (https://www.bloomberg.com/news/articles/2023-10-17/white-house-eyes-100-billion-ukraine-israel-and-border-ask).
Note that Treasury behaved similarly in 2020 when it overfunded the TGA to $1.8t in anticipation of imminent pandemic stimulus.
Current TGA levels suggests that the proceeds of future debt issuance will be used to finance fiscal spending.
This would in effect allow funds to flow from the RRP to the banking system.
Depending on net bill issuance, reserve balances and deposits levels could be a few hundred billion higher this time next year despite ongoing QT.