The U.S. Treasury Department announced on Monday its plans to borrow significantly more money in the April-June quarter than previously expected. The unexpected news raises concerns over rising interest rates, particularly for longer-term Treasury issuance. This implies that investors may soon face higher interest rates, regardless of the Federal Reserve’s decision at the next Federal Open Market Committee (FOMC) meeting.
Low Tax Receipts Lead to Borrowing
The Treasury Department attributed the higher borrowing needs to lower-than-expected tax receipts. While the department had projected a more optimistic revenue stream earlier in the year, internal adjustments revealed a shortfall. The exact figures for revised tax receipts are not ordinarily publicly disclosed, but more details on the borrowing needs will be presented later in the week.
Impact on Treasury Yields
The basic economic principle of supply and demand unquestionably applies to the investment markets. Increased debt issuance translates to a larger supply of Treasury bonds. When supply goes up, prices tend to fall. In the context of bonds, lower prices equate to higher yields (interest rates).
This scenario unfolded similarly in October, as the demand for extra debt drove the 10-year Treasury yield to nearly 5%.
Market Expectations and FOMC Announcements
The new forecasts for Treasury borrowings exceed Wall Street’s initial projections. According to a U.S. Treasury press release, for the April – June 2024 fiscal quarter the Treasury now expects to borrow $243 billion in marketable debt. The borrowing estimate is $41 billion higher than announced in January 2024. The Treasury attributes this to lower-than-anticipated tax receipts.
Moreover, Deutsche Bank (NYSE: DB) and Morgan Stanley (NYSE: MS) have forecasted significantly lower estimates of $162 billion and $166 billion, respectively. With these much lower estimates baked into bond yields, the 10-year Treasury yield spiked initially after the news, but it still managed to close the day lower than the open. This movement suggests some initial market uncertainty regarding the full impact.
More detailed plans regarding specific debt maturities are expected to be released on Wednesday. The breakdown of three, 10, and 30-year bond offerings will be the focus of investors. Higher-than-anticipated issuance in these longer maturities could represent a deviation from the Treasury’s stated goal of “regular and predictable” debt issuance which could also upset the markets and potentially push yields higher.
Higher Yields and Market Moves
Elevated Treasury yields can have a ripple effect across the broader market. The increased cost of money translates into higher borrowing costs throughout the economy, affecting businesses and consumers alike. Furthermore, higher rates offer a seemingly lower-risk investment with contractual certainty; unlike stocks, bondholders know what to expect in terms of returns. As bond market returns become more competitive when yields rise, this alternative investment option, particularly compared to equities, can exert downward pressure on stock prices.
Key Takeaway
All markets are connected; this is particularly true of the fixed-income markets and the equities markets. The U.S. Treasury will be creating unexpected billions more in fixed-income securities, in addition to the trillions already outstanding. The degree to which this will push interest rates higher is not known yet. More information on the U.S. Treasury’s plan and the Federal Reserve’s next move will be announced midweek.
