Recent Treasury Quarterly Refunding Announcements a Mixed Bag for Global Liquidity

by Team of Euro Pacific Capital, 8/5/24

We’d recently written a piece on the importance of following the Treasury’s projected Treasury General Account Balance (TGA). On July 31, the U.S. Treasury released its most recent Quarterly Refunding Announcement which revealed its financing strategy, presenting both positive and restrictive elements for global liquidity.

Decrease in Expected TGA Balance and Borrowing Needs

A significant highlight from the Treasury’s announcement is the revised projection for the Treasury General Account (TGA) balance by the end of Q4 2024. The Treasury now expects the TGA balance to be $700 billion, a decrease of $150 billion from the previous projection. Additionally, the Treasury has adjusted its borrowing needs for the fourth quarter, reducing it by $106 billion, now projecting a borrowing requirement of $740 billion. This follows its expectation for easing inflationary and growth pressures over the short-term.

These reductions in borrowing needs and the lower TGA balance are seen as positive for market liquidity, as they reduce the cash the Treasury pulls from the financial system, supporting broader economic stability.

Treasury’s Future Issuance Strategy

Despite the current focus on managing immediate borrowing needs, the Treasury also signaled its long-term strategy to shift towards issuing more longer-dated securities. The Treasury’s analysis suggests that while Treasury Bills (T-bills) are effective at absorbing unexpected increases in the federal deficit, the preference is to gradually issue more longer-term securities.

It remains to be seen whether this strategy will be successful. We would not be surprised to see the Treasury continually surprised by the larger than expected federal deficit, and as a result see it rely on a larger proportion of shorter dated t bills. As we have mentioned in previous webinars and market updates, the level of fiscal debt and the high interest rates, have combined to create a “reflexive cycle” in which the interest on the national debt is becoming a larger and larger portion of the deficit. While a recession would certainly cool things off, this doesn’t seem to be in the cards near term, at least, given the resilience we have seen in the consumer to borrow and spend.

In addition, the Treasury is increasingly depending on domestic private borrowers to purchase T-bills. If this trend continues, the private sector may demand higher returns, further increasing borrowing costs.