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US Treasury Sets First Quarter Borrowing Record

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The US government has hit borrowing levels not seen since the peak of the financial crisis.

The US Treasury’s net borrowing totaled $488 billion from January through March, according to a statement released Monday. That was $47 billion more than the department’s estimate. It was also a record for first quarter borrowing, according to Bloomberg.

With the Trump tax cuts coming online and spending increases passed by Congress, the rate of borrowing has ramped up significantly. And a Bloomberg report noted the US will need to issue even more Treasuries as the fiscal picture deteriorates.

The budget deficit widened to $600 billion halfway through the fiscal year, as spending increased at three times the pace of revenue growth in the October-to-March period, according to Treasury figures released earlier this month. Tax and spending measures approved by Congress and President Donald Trump are expected to push the budget gap to $804 billion in the current fiscal year, from $665 billion in fiscal 2017, and then surpass $1 trillion by 2020, according to the Congressional Budget Office.”

With a higher than expected cash balance of $290 billion at the end of Q1, the Treasury Department said it will only have to borrow $75 billion in the second quarter – $101 billion lower than announced in January 2018. But the department expects borrowing to ramp up again in the third quarter, estimating it will need to sell $273 billion in Treasuries.

Treasury Secretary Steven Mnuchin said he wasn’t concerned about selling so many bonds. He admitted there was a lot of supply, but called the market very “large” and “robust,” adding that he thinks it “can easily handle it.”

By definition, supply and demand will equate. I’m not concerned about that. I think that there are still a lot of buyers for US Treasuries.”

That’s an odd statement. Of course, supply and demand will equate. But Mnuchin seemed to forget about the other side of the equation – price. In order for demand to rise and match higher levels of supply, Treasury prices will likely drop – perhaps significantly. And when bond prices drop, that means higher interest rates. We’ve already seen signs of this in rising bond yields. Ten-year Treasuries pushed about the 3% level last week.

Of course, rising interest rates have consequences.

The world is drowning in debt. Rising interest rates in a high debt environment don’t bode well. Of course, increasing Treasury yields mean the government will have to pay an increasing amount of money just to service the interest payments on the debt. That will lead to even more borrowing, creating a vicious cycle. But as a recent Palisade Research article pointed out, “The U.S. Treasury will get funded no matter what – foreigners will buy the debt, or the Fed will print dollars to do it. Either way, they will borrow – no matter the cost. But individuals and companies that borrow aren’t as lucky. They’re forced to pay the higher interest payments.”

Higher rates pose a more significant problem for private companies. Palisade estimates there is over $7.5 trillion in debt floating around out there that is highly vulnerable to rising interest rates.

And Despite Mnuchin’s optimism, it still remains unclear who is going to buy all of this US government debt.

The US government depends heavily on three major buyers to finance its debt – China, Japan and the Federal Reserve. All three are pretty much out of the market right now.  The last time the Treasury ramped up borrowing during the financial crisis, the Fed took up the slack. But the central bank is supposedly shrinking its balance sheet. That means not only is it not buying, it is ostensibly going to dump more bonds on the market. And we reported last month, China may slow or even stop its purchase of US Treasuries. In other words, there may well be a glut of Treasuries out there in the marketplace. This means falling prices and rising yields.

So, yes Mr. Mnuchin, supply and demand will equate. But the consequences could be disastrous.

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