The US Treasury market hit a record high in July, surpassing $25 trillion for the first time in its history. This has been reached as the US government continues to borrow to fund its operations and fiscal stimulus.
Treasury bills, short-term bills, and bonds outstanding rose about 1% in July to a record $25.137 trillion, according to data released on Friday. As of June 2020, the US had less than $20 trillion in outstanding marketable debt. In June 2018, it was below $15 trillion.
Borrowing surged in 2018 to fund tax cuts, and in 2020, borrowing surged to help fund the federal government’s response to the pandemic. Now, that amount is increasing, in part because rising interest rates have increased the cost of servicing existing debt. The outlook for the federal budget deficit has also deteriorated. Next week’s quarterly auctions of new 10- and 30-year notes will be the first to surpass previous auctions in more than two years.
Higher Interest Rates Will Raise Interest Costs On The National Debt
US Treasuries’ allure as safe haven noted in short maturities, not in long bonds
The United States has a large negative net foreign asset position, especially in safe assets. In times of crisis, US government debt, especially short-term government debt, is considered a safe haven. As a result, the United States is a net debtor. It is more leveraged and tends to hold riskier assets (primarily stocks) and finance those positions by selling safe asset debt to the rest of the world.
In normal times, this leads to a country's exorbitant privilege - it earns more from its foreign assets than from its foreign liabilities. But in a crisis situation, this situation leads to "irrational responsibility" of the state - if the holding of risky assets is financed by safe credit, then there is a transfer of wealth from the United States to other parts of the world when the prices of risky assets fall.
US Treasury Market Performance
Since its founding, the U.S. government has issued bonds to finance its businesses. However, debt levels have increased significantly in recent years. In response to the coronavirus pandemic, the US government has issued bonds to fund its stimulus programs, among other things, which has also helped boost demand for US Treasuries.
Short-term Treasury yields have remained high above 5% in April, partly because the US Federal Reserve Board (FRB) quickly raised interest rates to curb inflation. The Fed raised rates again a week ago, bringing the policy rate to the 5.25% to 5.5% range, the highest in 22 years. Investors have been riding the Treasury issuance trend since June's debt ceiling deal allowed the U.S. Treasury to replenish, albeit at higher borrowing costs than recently remembered. A “tsunami” of additional issuance was expected after the Treasury announced a third-quarter borrowing estimate of $1 trillion.
Yields on long-term 10-year Treasury bonds, which are used to price everything from mortgages to commercial real estate debt, rose to 4.048% on Tuesday, the second highest in 2023, according to Dow Jones Market Data. Shares beat expectations on a strong rally, trading about 5% below their all-time highs. The Dow Jones Industrial Average DJIA rose 7.5% in the year, the Sandoz P500 index rose 19.2% and the Nasdaq Composite rose 36.5%, according to FactSet.
US Treasury market faces challenges
The US Treasury boosted its estimate for federal borrowing for the current quarter as it addresses a deteriorating fiscal deficit and keeps replenishing its cash buffer.
The Treasury Department increased its net borrowing estimate for the July through September quarter to $1 trillion, well up from the $733 billion amount it had predicted in early May.
The new amount, published on Monday, is a record for the September quarter and in excess of what some close watchers of the figure had expected. JPMorgan Chase & Co. had penciled in $796 billion. Lou Crandall at Wrightson ICAP LLC predicted $885 billion.
Part of the higher borrowing estimate is due to a bigger cash balance planned for the end of September. The Treasury bumped that number up to $650 billion, from the $600 billion it had anticipated three months ago. The cash stockpile — known as the Treasury General Account, or TGA — is currently about $552 billion.
Since Congress and the White House agreed to suspend the debt limit in early June, the Treasury has been ramping up its cash balance — which debt managers had run down toward zero as they made good on federal obligations without being able to increase borrowing.
The US Treasury market faces several challenges in the near term as the US government and Federal Reserve grapple with economic recovery and inflation risks. The main factors that can affect the government bond market are:
Tapering: Tapering refers to the gradual winding down of the Federal Reserve's asset purchase program, which has supported the Treasury market and kept interest rates low since March 2020. The Fed buys $80 billion of Treasury bills and $40 billion of mortgage-backed securities each month, suggesting it could start reducing purchases later this year or early next year, depending on economic conditions. are doing. Tapering could lead to higher interest rates and lower bond prices in the US Treasury market.
Inflation: The Fed argues that inflation is temporary and driven primarily by temporary factors related to the pandemic such as supply chain disruptions, pent-up demand and base effects. But some investors and analysts fear continued inflation could erode the value of government bonds.