U.S. Treasury Plans Record Debt Issuance Amid Fiscal Pressures
Earlier this week, on Monday, the U.S. Treasury released its estimates on debt sources and uses for the upcoming quarter. The report indicated that, while the Treasury expects borrowing needs to be slightly less in the fourth quarter of this year, there will be a substantial increase in borrowing early next year. Specifically, the Treasury is preparing to issue $823 billion in debt for the first quarter of 2025, a significant rise from the projected $546 billion in the current quarter. This would be a record nominal issuance amount for Q1, highlighting the mounting financing demands the government anticipates for early next year.
Then, today, the Treasury issued its latest Quarterly Refunding Announcement. This one, compared to previous announcements, was a bit quieter without any major surprises. The Treasury confirmed that it would maintain the sizes of its quarterly auctions for longer-term debt, reiterating its previous guidance that auction sizes are expected to stay steady for several more quarters. Next week's quarterly auctions will total $125 billion, in line with expectations. Of this, around $116.4 billion will go toward replacing maturing Treasuries, while approximately $8.6 billion will be fresh capital raised from private investors.
Breaking down these figures, the Treasury will offer a 3-year note at $58 billion, consistent with previous auctions. It will also offer a 10-year note at $42 billion, a $3 billion increase from last month, and a 30-year bond at $25 billion, which is $2 billion more than last month. Importantly, these sizes remain unchanged from the last refunding round.
Regarding Treasury Inflation-Protected Securities (TIPS), the Treasury made some slight adjustments, continuing its gradual increases to maintain TIPS at a stable portion of overall debt. This includes slightly raising auction sizes for the 5-year TIPS reopening in December and the new 10-year issue in January, aligning with a strategy to maintain the share of TIPS as a percentage of total marketable debt. For example, November's 10-year TIPS reopening will remain at $17 billion, while December's 5-year TIPS will increase by $1 billion to $22 billion, and January's 10-year TIPS will rise by $1 billion to $20 billion.
The Treasury also shared its approach to maintaining a steady level of nominal coupon or floating-rate note (FRN) auction sizes, emphasizing that it does not expect to increase these for at least the next few quarters. This consistent language, used since May, reflects an effort to meet projected borrowing needs without resorting to frequent changes in auction sizes. For short-term financing, the Treasury intends to keep benchmark bill offerings stable through November. By late November, it plans to issue one or two cash management bills (CMBs) to address its immediate cash needs. Given the anticipated cash inflows from mid-month corporate tax receipts, Treasury expects to reduce short-term bill auction sizes modestly in December. Following that, the Treasury expects to ramp up bill issuance again in January to align with fiscal outflows.
In light of the staggering increase in U.S. debt and the accompanying surge in borrowing, which has pushed debt interest expenses to an unprecedented $1.1 trillion, some bond strategists speculated that the Treasury might reconsider its guidance on holding auction sizes steady. Most dealers, however, anticipated no changes, noting that current auction sizes, many of which are already at record levels, should suffice to cover the government's funding needs until at least the second half of 2025. That projection could change, of course, depending on any major fiscal initiatives from the next administration.
Bloomberg recently noted that since deficit reduction has not been a prominent feature in either Trump's or Vice President Harris's campaigns, increasing long-term debt issuance may become inevitable. The rise in yields seen recently could be a reflection of this, as bond markets anticipate more significant issuance down the line.
In its latest plan, the Treasury highlighted the role of bills, which mature in up to a year, to handle seasonal or unexpected borrowing fluctuations. As previously mentioned, it expects to decrease short-term bill issuances in December but then increase them again in January. Given that this week's announcement is the final refunding plan of the Biden administration, several strategists advised taking the Treasury's guidance with some caution. Whoever wins the November 5 presidential election will likely adjust the U.S. debt management strategy, including appointing a new Treasury secretary.
One looming challenge for the next administration will be navigating the federal debt limit, which is set to come back into effect at the start of January. Once that limit is active, the Treasury will have to rely on extraordinary measures, including reducing bill issuance and depleting its cash reserves, until Congress either lifts or suspends the ceiling. In parallel, the Treasury Borrowing Advisory Committee (TBAC)—a critical advisory panel composed of financial dealers, fund managers, and other market participants—emphasized that constraints around the debt limit could hinder efficient funding for the government. According to the TBAC, unresolved debt limit issues risk undermining confidence in the Treasury market and could lead to economic uncertainty, market disruptions, and potentially harm the U.S. credit rating.
As the debt limit's reinstatement coincides with the Treasury's highest seasonal borrowing needs, the department warned that net borrowing for the January-March period would reach an estimated $823 billion, a record amount. This estimate, however, assumes that Congress will resolve the debt limit issue in time.
The Federal Reserve's current approach of letting up to $25 billion of Treasury holdings mature each month without replacement has added to the Treasury's issuance burden. The upcoming Fed policy meeting on November 6-7 will likely address whether to continue this runoff. Many are concerned that further reductions in liquidity could exacerbate stress in the repo market, potentially leading to volatility in bond yields.
Lastly, in preparation for the refunding, the Treasury reached out to dealers for input on possible new TIPS maturities and the application of digital technology in the Treasuries market, exploring blockchain's potential role in market issuance and secondary trading. Additionally, today's announcement included the Treasury's buyback program schedule from November through early February, a program designed to support market liquidity.