The looming reinstatement of the debt ceiling may also be addressed when the Treasury announces its borrowing requirement for the second quarter on Monday, followed on Wednesday with refunding details, including anticipated auction sizes for each maturity of notes and bonds. “Certainly, (auction sizes) don’t need to get bigger. At this point we’re looking at when are they going to get smaller,” said Tom Simons, a money market economist at Jefferies in New York. “I think (Treasury) will give us the heads up that a change is coming likely in August.”
The sizes of note and bond auctions climbed to record levels in 2020 to fund massive stimulus measures to combat the economic fallout from the coronavirus pandemic. Treasury issuance raised a total of $4.28 trillion in net cash last year, according to Securities Industry and Financial Markets Association (SIFMA) data. Aided by the COVID-19 vaccine rollout this year, the outlook for the economy has brightened.
“The budget deficit forecast is coming down so essentially Treasury’s financing need has come down longer term, and so with that, unless they wanted to pay down bills more or run the cash balance up, neither of which we expect they want to do, they’ll eventually have to bring (auction sizes) down,” said Zachary Griffiths, macro strategist at Wells Fargo in Charlotte, North Carolina.
In fact, the Treasury has to start taking steps to reduce its cash balance, currently at around $930 billion, ahead of the Aug. 1 return of the debt limit, which was suspended in 2019.
“They’ll probably discuss how to manage the debt ceiling, and how to manage the declining cash balances as well,” said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.
Simons said the Treasury could eliminate one or both of its remaining cash management bill offerings given that it needs to make significant paydowns and a desire to reduce bills as a percentage of outstanding debt.
In February, the Treasury pegged its second quarter borrowing needs at $95 billion in net marketable debt assuming an end-of-June cash balance of $500 billion. That projection was made before enactment in March of the American Rescue Plan, which injects $1.9 trillion of stimulus spending into the economy.
There is also uncertainty over the fate of President Joe Biden’s proposed $2.3 trillion American Jobs Plan, which includes major infrastructure financing, and an $1.8 trillion American Families Plan.
Analysts said unlike recent stimulus measures, spending under those proposals would be spread out over several years and offset in part with tax increases.
Net cash raised from Treasury debt sales in 2021’s first quarter was $400.7 billion, down from $597.4 billion in 2020’s fourth quarter, SIFMA data showed. Reporting By Karen Pierog in Chicago, additional reporting by Karen Brettell in New York; Editing by Alden Bentley and Marguerita Choy