President Joe Biden and his administration have warned taxpayers of trillion-dollar deficits over the next decade. But while guaranteeing budget shortfalls is a chief tenet of Bidenomics, determining how to fund these gaps has become much more complicated in recent months. The Treasury Department had a eureka moment to cover the widening deficit: Borrow more. As the iconic Geico television commercial from the early 2000s goes, "It's so easy a caveman could do it."
Borrowing for Bidenomics
It was quite a week for the Treasury Department as it made two critical announcements on October 30 and November 1 that will clean up the red ink flowing from Bidenomics and plug the holes in a broken economy.
The first was that the federal government planned to borrow $776 billion in the final three months of 2023, slightly below the consensus estimate of $800 billion and down from the previous quarter's total debt sale of $1.01 trillion. In the first quarter of 2024, the Treasury projected that Washington would borrow a higher-than-expected $816 billion. The challenge for US officials is that tax receipts are down, and the only way to fill the gap is to tap into capital markets.
The second was a refunding reveal. The department intends to increase the size of bond sales to help manage the astronomical debt and ballooning financing costs. The initiative will begin by auctioning $112 billion in debt to refund roughly $102 billion of notes that will mature on November 15, which will raise approximately $9 billion. This will consist of a three-phase approach: $48 billion in three-year notes, $40 billion in ten-year notes, and $24 billion in 30-year securities. Officials say they will enhance the sizes of two- and five-year notes by $3 billion a month and bolster three-year notes by $2 billion per month. Additionally, auctions of the seven-year note will increase by $1 billion monthly.
(Photo by Kevin Dietsch/Getty Images)
Evidently, the Treasury is putting all its eggs on short-term Treasurys because it thinks the Federal Reserve will start cutting interest rates by the end of next year. Financial markets appear to agree as investors are penciling in a rate reduction sometime in the third quarter of 2024.
Is There Demand?
Here is something garnering more attention on Wall Street: Treasury auctions. These have been hebetudinous events that have hardly drawn any eyes because they have been guaranteed cash generators for the US government. As of late, however, they have struggled to attract investor demand.
The short-term notes, such as the 42-day and the 26-week, have outperformed expectations. However, everything from the two-year note to the 30-year bond has resulted in higher yields because domestic and foreign investors have shrugged off the sales. Even the Treasury Department's Borrowing Advisory Committee has taken notice and issued a detailed report on the subject:
"Demand for US Treasuries may have softened among several traditional buyers. Bank security portfolio assets have been declining since last year with bank holdings of Treasurys down $154 billion compared to one year ago. The appreciation of the U.S. dollar means some foreign central banks may consider liquidating Treasury securities in the process of defending their currencies.”
Considering the sharp decline in Treasury yields since Federal Reserve Chair Jerome Powell signaled that the central bank is finished raising interest rates at the November Federal Open Market Committee (FOMC) policy meeting, will this trend persist in the coming months? All eyes will be on the Nov. 7 three-year note auction and Nov. 8 ten-year note auction. Will investors scoff at the substantial flooding of government debt and demand more than 4% and 5%, or will they accept lower returns? It will be a riveting moment for the US government and taxpayers.
Drunken Sailors
Billionaire hedge fund manager Stanley Druckenmiller emphatically told Washington in a recent CNBC interview: "We’ve got to stop guys, we’re drunk." Is he right? The Treasury Department all but vocally agreed with his assessment after slipping into panic mode by announcing new efforts to issue more bonds and bolster auction sizes to pay for Bidenomics. While they might serve as short-term remedies, policymakers fail to address the long-term problems. The act of perpetually kicking the can down the road may no longer be a feasible option on Capitol Hill.
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