The U.S. Treasury Department announced Monday that it expects to borrow $760 billion in the first quarter of 2024, $56 billion less than its previous estimate in October 2023. The reduction reflects an improvement in the government’s finances.
Key Details
- The Treasury plans to borrow $476 billion in privately-held net marketable debt from January through March 2024. This is down from the October estimate of $550 billion.
- It will also borrow $284 billion by issuing new debt to relevant government accounts, down from $266 billion estimated in October.
- In total, the $760 billion Q1 borrowing estimate compares to $816 billion borrowed in Q1 2023.
- The Treasury cited higher tax receipts and lower outlays so far this fiscal year as reasons it could lower the borrowing amount.
- For the full 2024 fiscal year ending September 30th, the budget deficit is still projected to be $1.4 trillion.
“The improvement in the outlook for the first quarter has allowed Treasury to modestly reduce borrowing while still providing a prudent cushion to meet unanticipated needs,” said a senior Treasury official.
Market Reaction
The lowered borrowing estimate was seen as good news by investors, contributing to a rise in stock prices and fall in bond yields on Monday morning.
- The S&P 500 gained 0.8% shortly after the Treasury announcement
- The 10-year Treasury yield fell to 3.48% from 3.52% Friday
- The dollar index dropped 0.3% to 101.85
“It’s a Goldilocks scenario for markets,” said Bill Smith, senior fixed income analyst at Bank of America. “Economic growth is moderating to slow the budget deficit, but not so much as to cause a recession.”
The reaction suggests investors believe the improving fiscal picture means reduced risk of crowding out private investment via Treasury issuance. It also indicates less concern about the government’s ability to meet obligations.
Auction Changes
Despite lowering the Q1 estimate, the Treasury is still expected to boost issuance of longer-term bonds over the quarter.
- The 7-year note auction size could increase from $36 billion to $42 billion.
- The 20-year bond auction may rise from $17 billion to $22 billion.
- The 30-year bond auction is anticipated to increase from $15 billion to $20 billion.
These increases would help finance future deficits projected to average over $2 trillion per year throughout the 2020s according to Congressional Budget Office baseline forecasts.
“Extending maturities now while rates are relatively low can save taxpayer money over the long run,” said Megan Greene, senior fellow at the Harvard Kennedy School.
Outlook for Deficits and Borrowing
While deficits are still historically high, this latest borrowing estimate points to moderate improvement on the fiscal front.
The White House Office of Management and Budget projected last March that the budget deficit would fall from $1.4 trillion (5.5% of GDP) in fiscal 2023 to $1.3 trillion (4.3% of GDP) in fiscal 2024. Economic growth and the deficit reduction law passed last year are helping to constrain deficits.
However, an economic slowdown or recession later this decade could quickly reverse the progress. Interest costs on existing debt are also projected to rise substantially, intensifying future deficit strains.
| Fiscal Year | Budget Deficit | Deficit-to-GDP Ratio |
|---|---|---|
| 2023 | $1.4 trillion | 5.5% |
| 2024 | $1.3 trillion (est.) | 4.3% (est.) |
| 2025 | $1.5 trillion (est.) | 4.6% (est.) |
| 2026 | $1.7 trillion (est.) | 5.0% (est.) |
While borrowing costs stay low for now, the sheer size of public debt outstanding means interest expenditure will consume a growing share of the federal budget in coming years:
| Fiscal Year | Net Interest Costs | % of Total Outlays |
|---|---|---|
| 2023 | $475 billion | 9.4% |
| 2024 | $617 billion (est.) | 11.3% (est.) |
| 2025 | $749 billion (est.) | 12.9% (est.) |
| 2026 | $913 billion (est.) | 14.8% (est.) |
What Investors Should Watch
Treasury auctions and data on budget deficits will remain important indicators for investors to monitor. Signs of improving fiscal discipline could boost markets, while evidence of widening deficits or poor demand for bonds would be concerning.
Other key signals to follow over the coming quarters and years:
- Economic growth: Stronger expansion would lift tax revenues and likely reduce deficits.
- Inflation: High inflation could enable deficit reduction via bracket creep, but also raise program costs.
- Interest rates: Rising rates make borrowing more expensive for the Treasury.
- Tax policy changes: Tax hikes or closed loopholes would curb deficits.
- Program reforms: Constraints to the growth of major health and retirement programs would help.
- Overseas demand: Foreign appetite for U.S. bonds helps finance deficits but could wane.
The latest Treasury borrowing projections offer a dose of good news on the fiscal front. But major risks around deficits and debt remain in play for investors over the long run. Ongoing scrutiny of budget trends is warranted.
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.
