The U.S. Treasury expects to issue $617 billion in net saleable bonds in the fourth quarter of 2020, down 49.26 percent ($599 billion) from the $1.216 trillion projected in August, hinting that the Treasury is still tightening fiscal stimulus.
Treasury officials said on Monday that $617 billion of borrowing in the fourth quarter would be up 35.9 percent from $454 billion in the third quarter, but that would be well below the record $2.75 trillion in the second quarter. In addition, the Treasury estimated that government borrowing will jump to $1.13 trillion in the first quarter of next year, which could be used to pay for the new fiscal stimulus package approved by Congress.
By the end of December this year, the U.S. Treasury cash balance is expected to be about $800 billion, consistent with the August forecast. To date, the U.S. Treasury is sitting on a cash balance of nearly $1.7 trillion, and most strategists believe that the Treasury’s insistence on keeping a larger-than-normal cash cushion is designed to hand out checks to Americans as quickly as the fiscal plan allows.
But it’s unclear whether the fiscal stimulus package will be legislated immediately after the election or whether a new round of fiscal stimulus will not be introduced until the new Congress is inaugurated next January.
Recently, Wrightson ICAP chief economist Lou Crandall wrote in a report.
“How the U.S. Treasury’s Monday financing projections will translate into realistic financing decisions will also depend on legislation. But with a new round of fiscal stimulus coming sooner rather than later, the debt ceiling issue next summer is expected to make the outlook for the first quarter of 2021 even bleaker.”
As of September, the U.S. budget deficit stood at a record $3.1 trillion, or 16 percent of gross domestic product, the highest level since 1945. In May, the U.S. budget deficit more than tripled after Congress passed $3 trillion in relief measures.
In addition, there’s one more thing for bond traders to keep an eye on the day after Election Day on Nov. 3. At 8:30 a.m. New York time on Wednesday, the U.S. Treasury will announce its quarterly bond issuance plan, and given that Wall Street traders are divided on whether the bond issue will hit another record high or remain at current levels, yields could fluctuate sharply.
If forecasts from TD Securities, Citigroup and NatWest Markets that bond issuance will expand prove to be correct, it will be another opportunity for long-term yields to soar.
Outside firms such as Deutsche Bank and Amherst Pierpont Securities LLC are predicting even bigger increases to August levels, meaning another $6 billion in 10-year bond issuance, $5 billion in 20-year bonds and $4 billion in 30-year bonds.
However, the yield curve could flatten if the forecasts of other banks such as Barclays, Jefferies and Société Générale that there will be no adjustment in size are correct. Their view is based largely on the uncertainty facing additional outbreak relief spending at a time when the Treasury is sitting on near-record levels of cash.
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