The US Is Looking A Bit Spread Thin, Budget Wise

The US Is Looking A Bit Spread Thin, Budget Wise
Reda Farran, CFA

about 1 month ago2 mins

What’s going on here?

The US Treasury said it’ll borrow less money than predicted this quarter, but soured the deal with a jumbo forecast for the next one.

What does this mean?

Every quarter, the Treasury announces how much funding it needs for the upcoming six months. That’s a must-watch reveal for bond investors, because the level of borrowing indicates the amount of US government bonds that will flow into the market. More borrowing, more bonds. And the more bonds issued, the lower their prices and the higher their yields – the return investors expect every year until a bond’s maturity. For this quarter, the Treasury dropped its estimated borrowing by some $70 billion. Mind you, the remaining $776 billion in predicted funding is still the most ever announced in the fourth quarter of the year. And what’s more, the Treasury penciled in a more-than-expected $816 billion for the first quarter of 2024.

Why should I care?

The bigger picture: Good intentions.

The government’s budget deficit – the difference between what it makes in taxes and spends – is only widening, with everything from tax cuts to mounting defense costs to economic stimulus initiatives to blame. While the Treasury has been selling bonds to plug the gap, that move will only add to the US’s eye-wateringly huge debt pile. That, at a time when high interest rates are ramping up payments on debt and worsening the budget deficit. And so a vicious cycle starts: more bonds are sold, more interest is due on them, the worse the deficit gets, and repeat.

Federal interest payments

For markets: Rates, rates, go away.

Prices of Treasury bonds have been crushed by high interest rates, which explains why the bonds are on track for an unprecedented third year of losses. And there’s no sign of that changing anytime soon: the Federal Reserve held rates at their 22-year high on Wednesday, while keeping the option of another rate hike on the table.

Treasury bond losses


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