(Bloomberg) — US fiscal deficits are projected to grow over the next decade, likely pushing the government to increasingly rely on Treasury bills and healthy demand to plug the holes.
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The nonpartisan Congressional Budget Office last week upped its deficit estimate for 2024 to almost $2 trillion from about $1.6 trillion in February, signaling a higher threshold for federal borrowing. Total deficits are expected to equal or exceed 5.5% of GDP in every year from 2024 to 2034, it said.
Those latest projections sounded the alarm on Wall Street, prompting analysts to revise trajectories for bill sales. While Treasury is well funded over the next two years due to recent coupon auction increases, the gap “widens measurably” into the 2030s, according to Citigroup Global Markets. Analysis of the long-term funding shortfall suggests the department has “few options but to grow T-bill share over time,” strategist Jason Williams wrote in a note to clients.
The Treasury Borrowing Advisory Committee — comprising dealers, investors and other stakeholders — has recommended the Treasury skew future issuance toward shorter maturities where liquidity and investor demand is stronger. The group said it expects a meaningful deviation from its historical recommendation of T-bills making up 15% to 20% of all outstanding debt, before a return to the suggested range over time.
Treasury has issued roughly $2.17 trillion of bills on net since the beginning of 2023. Issuance now stands at 21.7% of all outstanding debt as of end-May and Citi strategists see that share growing.
“Coupon increases will be needed at some point in the future, but that is a 2026-2027 story in our view,” Williams wrote. “At this juncture, we suspect Treasury will be comfortable with T-bill share heading towards 25%, and perhaps even higher, since this would fall in line with historical levels and T-bill issuances help limit longer-end term premium risks.”
Boosting Estimates
Other Wall Street strategists have revised their near-term outlook for bill supply higher. Barclays Plc now sees net issuance of $600 billion in 2024 and $300 billion in 2025, both $200 billion higher than previous estimates, due to the more pessimistic CBO numbers. That means bills as a share of total debt outstanding is likely to climb above 22% this year, according to strategist Joseph Abate.
Deutsche Bank strategists Steven Zeng, Matthew Raskin and Brian Lu said since Treasury noted at last month’s refunding announcement it anticipated no further coupon size increases for at least several quarters — any near-term deficit increases will be absorbed though higher bill issuance. They now see net bill issuance of $500 billion in 2024 versus the previous forecast of $350 billion.
Still, demand for short-dated government debts continues unabated given that yields are still above 5% and money-market funds are sitting on over $6 trillion of assets. At the same time, there’s still more than $400 billion parked at the Federal Reserve’s overnight reverse repo facility, which “represents a source of demand for front-end investment alternatives,” according to Morgan Stanley strategist Martin Tobias.
“A backdrop of healthy front-end demand should continue to provide Treasury with the conditions to increase the pace of bill issuance to the private market” in the second half of 2024, he wrote. “ Given attractive yields and still-ample liquidity in the front-end, we expect demand for bills to remain strong for a key cohort of the market.”
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