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The Treasury Department will provide an update on its debt issuance plans on November 1.
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Some Wall Street banks have raised their forecasts for the amount of Treasurys to be auctioned.
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Meanwhile, bond market investors have shown signs of lackluster demand for the rising supply of debt.
Investors are eagerly awaiting the Treasury Department’s upcoming quarterly refunding statement as Wall Street prepares for another round of high levels of US debt.
Set to be released on November 1, the quarterly update will outline the department’s plans for issuing bonds over the next three months. A previous report with increased revisions has raised concerns about the bond market’s appetite for more Treasurys, causing yields to rise and leading to a historic price collapse.
As a result, the upcoming release of the refunding statement has garnered significant attention from the market. In recent weeks, investor demand for Treasurys has shown signs of weakness just as the government’s growing deficits flood the market with more debt.
Having raised auction estimates in August, the Treasury Department has already indicated that the issuance of Treasury bonds will need to continue increasing.
“Further gradual increases in coupon auction sizes will likely be necessary in future quarters,” said Josh Frost, assistant Treasury secretary for financial markets, in September, referring to longer-dated bonds.
This outlook is consistent with that of Wall Street, as institutions are raising their expectations for the amount of US debt issuance. Bank of America has revised its deficit expectations for the coming years, projecting that US overspending will reach $2 trillion by fiscal year 2026, up from $1.7 trillion in 2023. This increase will be driven by higher interest expenses on US borrowing, which will require the Treasury to issue more bonds.
Bank of America expects auction sizes to increase in November, followed by moderate expansions in the next six months. Assuming that the Federal Reserve’s quantitative tightening ends in June 2024, analysts estimate that debt supply in 2024 will be around $1.34 trillion in 10-year equivalents, which is $90 billion higher than previously forecasted.
JPMorgan also predicts higher Treasury issuance in the future, noting that the deficit for fiscal 2023 exceeded its estimates by $100 billion. The bank expects the Fed’s quantitative tightening to continue through 2024, creating a $720 billion financing gap. As current auction sizes are unable to meet this figure, JPMorgan anticipates a repeat of the auction increase seen in August.
However, Morgan Stanley has more conservative expectations, suggesting that the markets may be surprised in November.
“The Treasury might decide to increase coupons at a slower pace than what was suggested in its ‘regular and predictable’ strategy in August,” stated a note from Wednesday. “We expect more T-bills instead of coupons to make up a higher share of issuance through 2024.”
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