Investors are focused on the Treasury Department’s upcoming quarterly refunding statement as Wall Street braces for another dose of sticker shock on US debt.
Set to be released on November 1, the quarterly update will lay out the department’s bond issuance plans for the next three months. A prior report with upward revisions raised concerns about the bond market’s appetite for additional Treasurys, sending yields higher and contributing to a historic price collapse.
So the upcoming release is getting heightened market attention. In recent weeks, investor demand for Treasurys has shown signs of weakness just as the government’s ballooning deficits are flooding the market with more debt.
After raising auction estimates in August, the department has already hinted that the Treasury supply will need to keep increasing.
“Further gradual increases in coupon auctions sizes will likely be necessary in future quarters,” Josh Frost, assistant Treasury secretary for financial markets, said in September, referring to longer-dated bonds.
It’s an outlook shared by Wall Street, and institutions are raising their expectations on the size of US debt issuance.
Bank of America revised its deficit expectations higher for coming years, noting that US overspending will grow to $2 trillion by fiscal year 2026 from $1.7 trillion in 2023. A major factor driving this upswing will be higher interest expenses on US borrowing, forcing the Treasury to keep issuing more bonds.
BofA expects auction sizes to increase in November, followed by moderate expansions through the next half year. Assuming the Federal Reserve’s quantitative tightening ends in June 2024, analysts estimated debt supply during 2024 will be around $1.34 trillion in 10-year equivalents, or $90 billion higher than previously forecasted.
JPMorgan also projected higher Treasury issuance ahead, noting that fiscal 2023’s deficit surpassed its estimates by $100 billion. The bank expects the Fed’s QT to continue through 2024, creating a $720 billion financing gap. As current auction sizes cannot meet this figure, JPMorgan sees a repeat of August’s auction increase.
However, Morgan Stanley held back expectations of a large increase, saying markets may be in for a November surprise.
“The Treasury might decide to increase coupons at a lower pace than what its ‘regular and predictable’ strategy might have suggested in August,” a note from Wednesday said. “We expect more T-bills in lieu of coupons to make up a higher share of issuance through 2024.”
