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https://images.mktw.net/im-784371Major investment banks are coalescing around the view that the U.S. government’s borrowing needs should likely diminish through June, alleviating some of the anxiety that had gripped bond markets late last year.
On Monday, Treasury is set to reveal its revised forecast for first-quarter borrowing and a preliminary estimate of its second-quarter needs. That announcement will be followed with an auction schedule and other details on Wednesday — the same day as the Federal Reserve’s policy decision, which is widely expected to produce no action on interest rates.
At the moment, there’s less worry about the government’s upcoming round of announcements than what was seen at the end of 2023. In late October, the bond market was on pins and needles about the government’s growing fiscal deficit and what the Treasury’s fourth-quarter borrowing need might be.
The nervousness came at a time last year when there were questions about who would buy government debt and there was “some uncertainty about whether the Fed was truly done with raising rates,” economist Thomas Simons at Jefferies
JEF,
said via phone. “Now, the idea of the Fed being done has become the consensus and supply is less of a concern.”
Worry began to emerge last July, when Treasury announced an eye-popping $1.007 trillion estimate for borrowing in the third quarter of last year.
This then triggered the anxiety that led up to the agency’s next announcement three months later: Its fourth-quarter borrowing estimate released on Oct. 30, which overshadowed the Fed’s Oct. 31-Nov. 1 meeting.
Read: Why Treasury auctions have Wall Street on edge
That fourth-quarter estimate ended up coming in below expectations, at $776 billion, which helped ease the bond market’s concerns.
How Wall Street is now lining up
Now, Wall Street is looking to see how Treasury’s estimate of $816 billion in borrowing needs for the current first quarter will pan out, and what the agency has to say about the second quarter.
Strategists Steven Zeng, Matthew Raskin, and others at Deutsche Bank
DB,
expect Treasury to revise its first-quarter estimate down to $797 billion, or $19 billion less than first thought. In addition, the Deutsche Bank team expects Treasury’s borrowing needs to drop to $472 billion for the April-June period.
Key figures to watch in the next refunding announcement, according to Deutsche Bank. Figures are in billions of dollars.
Deutsche Bank
At Jefferies, Simons also expects a downward revision to Treasury’s first-quarter borrowing estimate, to $800 billion.
He’s also penciling in an estimated $60 billion of borrowing during the second quarter, assuming a cash balance of $750 billion at the end of that period. The estimate, which is less than what’s expected by his firm’s Wall Street peers, comes attached with a fair bit of uncertainty and reflects the boost that the government will likely get from incoming tax revenue between April and June, according to Simons.
Traders are looking ahead to next week’s Treasury announcements now that Friday’s U.S. inflation data is out of the way. Financial markets had a muted reaction to December’s mild PCE inflation reading. The S&P 500
SPX
and Nasdaq Composite
COMP,
along with Treasury yields
BX:TMUBMUSD30Y,
were slightly higher in late morning trading in New York.
“It’s no surprise there is significant attention being paid to next week’s [Treasury] announcement from a wider array of market participants than just those of us who follow Treasury finance for a living (or fun),” said strategist Jay Barry and others at JPMorgan Chase & Co .
JPM,
the biggest U.S. bank.
“With that in mind, we are not sure Treasury wants to be in the limelight once again, and given the relatively firm forward guidance offered in November, we look for next week’s announcement to be a relatively lower volatility event for rates markets than the last two events,” they wrote in a note this week.
JPMorgan expects Treasury’s borrowing needs for the second quarter to fall to $263 billion, assuming the department maintains a cash balance of $750 billion to $775 billion around the end of March and June. That would be down from what JPMorgan is expecting to be a revised $855 billion for the first quarter, higher than the Treasury’s initial estimate.
