By Gertrude Chavez-Dreyfuss
BOSTON (Reuters) -The bond market is bracing for up to $1 trillion of additional U.S. Treasuries supply in the second half of the year once lawmakers address the looming debt ceiling problem, possibly permanently, top rates strategists said on Tuesday.
Any new issuance will likely be focused on shorter-dated debt including bills.
With the flood of Treasuries, market participants are left to wonder: who is going to buy them all? Treasury issuance is meant to address the U.S. government’s huge fiscal deficit.
President Donald Trump’s sweeping tax-cut and spending bill would lead to a larger-than-expected $2.8 trillion increase in the federal deficit over the decade, despite a boost to U.S. economic output, the nonpartisan Congressional Budget Office projected.
The U.S. Senate could vote on Friday on Republicans’ tax and spending measure, said Treasury Secretary Scott Bessent on Tuesday, and he was confident the House would then pass that version.
“We are just about to go through a level shift,” said Mark Cabana, head of U.S. rates strategy at BoFA Securities, during a panel discussion on Tuesday at the Money Fund Symposium in Boston. “You’re going to see this big issuance clip and it’s coming within the next few months. You can debate exactly when they raise the debt limit, but the X-date is coming soon.”
Bessent had said that the so-called X-date when the government would exhaust remaining borrowing capacity under the federal debt ceiling would come sometime during the mid-to-late summer. When the debt ceiling is reached the Treasury is unable to increase borrowings, but if it is lifted or eliminated, the government can then issue more debt.
Cabana’s forecast is for new supply of Treasuries to hit $1 trillion by the end of the year. Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, also expects an increase of nearly $1 trillion in issuance this year, with about $700 billion supply in August and September.
A surge in Treasury supply could increase repurchase, or repo rates, which refer to the cost of borrowing short-term cash using Treasuries or other debt securities as collateral. Higher Treasury supply typically saturates the market with additional collateral, which can initially lower repo rates due to excess supply. However, if supply exceeds demand substantially, it may lead to higher repo rates as lenders demand more compensation for holding larger volumes of securities.
Goldberg thinks this year’s supply will be concentrated on the front end of the Treasury curve – the two-year to the seven-year sector.
