Projecting the debt ceiling's impact on TGA and UST issuance over the next 6 months

TLDR:

• TGA will drop to a level of ~175b at end of March

• Despite the debt ceiling, Treasury will meet their coupon issuance schedules for Q1 (56b net new to Treasury, 277b net new to public) and Q2 (70b net new to Treasury, 250b net new to public) as projected in the quarterly refunding documents and have “bonus borrowing” room to do it due to “extraordinary measures”.

• Despite the debt ceiling, Net treasury bill issuance will be ~328b in Q1 (including 78b additional between now and the end of quarter), materially less than Treasury’s projected 655b in net bill issuance.

• No Net treasury bill issuance in Q2 less than Treasury’s projected 30b in net bill issuance

• TGA level of ~150b at end of June

Hello!

Ready to take a dive into a rabbit hole of Treasury quarterly refunding, TGA projections, debt ceiling impact, “extraordinary measures” to avoid that ceiling for just a bit and yes a little bit of QT mechanics? I sure am, Lets Go!

Treasury’s projection of the Govt deficit in Q1

The Treasury projects the US govt.’s budget deficit to be ~658b in the 1^st quarter of 2023. Where did they announce that? Well they didn’t in so many words, but it follows from their updated debt issuance projections for the 1^st quarter released earlier this week. (found here https://home.treasury.gov/policy-issues/financing-the-government/quarterly-refunding/most-recent-quarterly-refunding-documents)

Specifically, treasury clarified that the starting balance of their Treasury General Account (TGA) at the Fed at the start of the quarter was 447 billion dollars. Further the Fed issued updated debt issuance expectations, expecting to borrow 932 billion dollars in privately held net marketable debt over the 1^st quarter (divided between 277b in coupons and 655b in bills) and projecting to end the quarter with a TGA balance of 500billion dollars.

Ok, but how does that lead to implicitly projecting a 658b US budget deficit? Well lets do the math:

447b  (TGA Start of 1^st qtr Balance)

+     932b  (Net privately held marketable debt issued in the qtr)

-      500b  (TGA End of 1^st qtr Balance)

-      221b  (UST QT that settled between January 1^st and March 31^st)

=     658b of budget deficit (TGA outlays due to govt. spending, paying federal employees, contractors etc. – TGA income aside from net debt issuance so mostly tax receipts)

Enter QT and Treasury’s expectation to issue 711b in net new debt this qtr

Wait 221b of QT? Why does QT matter in the calculation and furthermore why is it 221b, isn’t the Fed capping UST QT at 60b a month?

First, QT matters because the 932b of debt is net Privately held marketable debt. UST held at the Fed is not privately held and thus the 932b of net debt represents both net new debt issuance as well as the the amount of debt effectively transferring from the Fed to the public at large (privately held) as a result of QT each month. (Fed lets a UST mature, the treasury pays the fed the principal of the UST simultaneous with refunding that same amount from a new UST bought by the public on the same day so the level of treasury debt stays the same with QT, but it shifts from the Fed to the public at large). Accordingly, the treasury expects to issue 711b in net new debt (debt subject to the debt ceiling) that the public must absorb + 221b in debt will transfer from the Fed to the public due to QT.

OK, but why is 221b in QT settling in the 1^st quarter? Well it is absolutely true that the Fed is only running off 60b a month in UST as part of QT, but keen readers of my December QT dispatch might have noted that the end of month December coupon maturities matured on December 31^st and because 12/31 was a Saturday, those maturities and corresponding treasury issuance settled on the next business day, January 3^rd. Specifically ~41b of Decembers QT rolloff actually settled on January 3^rd. Add that to the 180b in QT due to January, February and March (March 31^st is a Friday so settlement of all of March’s QT will occur within the 1^st quarter) and you get 221b.

Cool so the Treasury is projecting (implicitly anyways) a 658b budget deficit this quarter funded by 711b in net debt (with the remaining 53b used to increase the TGA from 447b -> 500b). But uh, didn’t the Treasury just announce that we hit the debt ceiling on January 19^th? So how the heck are they gonna issue 711b in net new debt?

But uh, the Debt Ceiling, how can the Treasury issue 711b in net new debt?

Well, the first thing to rule out is that they didn’t manage to raise that net debt before Jan 19^th? And rule it out we can since the Treasury raised about 85b in net new bills between the 1^st and 19^th of January and actually had negative net issuance (to the treasury and thus the debt ceiling) of coupons through the 19^th of ~4b for a total of ~81b. (note you can check these numbers out yourself using the data available at https://fiscaldata.treasury.gov/datasets/daily-treasury-statement/public-debt-transactions). So they raised 81b of the 711b prior to hitting the debt ceiling on the 19^th. That leaves 630b to go. But they’ve hit the debt ceiling, they cant issue more debt. Right?

Well as of Friday morning I thought so, but then I read Andy Constan’s fabulous thread on his interpretation of the quarterly refunding (found here

Andy Constan @dampedspring

For those of you who think the TGA spend has been bullish because it has reduced debt issuance and pushed liquidity to the economy. Please review the recent QRA and my interpretation

) with the salient points in his third and fourth tweets in the thread. To wit…

“Fact that despite the debt ceiling the government has headroom to complete this borrowing and keep the TGA stable by not "raiding" the government pension but simply using the extraordinary measures duly authorized by congress to reclassify the G-Fund liability as no longer…

Debt subject to limit but not to erase the obligation. Also notice that is an accounting gimmick which in the future doesn't effect issuance at all when the obligation is once again classified as debt subject to limit but just means that the new limit needs to account for this”

Boom!, my previous assumption on what “extraordinary measures” meant was destroyed. Reality is, those “extraordinary measures”/accounting gimmicks  give the Treasury more room to borrow against the limit right now (though they will have to reverse those account gimmicks later, increasing the debt against the limit once the debt limit has been raised). So how much can the Fed “bonus borrow” through the end of march?

Quantifying the “extraordinary measures”

Looks the good folks over at jpm have quantified those “extraordinary measures” for us (https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/on-the-minds-of-investors/Will-the-us-run-out-of-funding-after-reaching-the-debt-ceiling/)

Assuming jpm’s analysis is accurate, the fed has about 328b of “bonus borrowing” available to it prior to the end of march due to “extraordinary measures”. (294 from the G Fund, 17 from ESF, and 17 from csrdf/psrhbf see the jpm post for details). Leaving the treasury another 168b in “bonus borrowing” (143b csrdf + psrhbf bond maturity on 6/30 + 25b csdrf/psrhbf) in Q2 though mostly at the very end of Q2.

630b (treasury projected net borrowing) – 328b (net borrowing Treasury can still do within the constraints of the debt ceiling utilizing “extraordinary measures” in Q1) still leaves us with a ~302b gap based on Treasury’s Quarterly Refunding Projections. How to explain?

Treasury’s net issuance projections for Q1 wont be reached (unless the debt ceiling gets raised soon)

The treasury does it themselves in footnote 3 of their marketable borrowing estimates for Q1 (https://home.treasury.gov/news/press-releases/jy1231) …

[3] The end-of-March and end-of-June cash balances assume enactment of a debt limit suspension or increase. Treasury’s cash balance may be lower than assumed depending on several factors, including constraints related to the debt limit.   If Treasury’s cash balance for the end of either quarter is lower than assumed, and assuming no changes in the forecast of fiscal activity, Treasury would expect that borrowing would be lower by the corresponding amount(s).

So essentially there’s a giant caveat to their end of March expected TGA level and net debt borrowed numbers that relies on the debt ceiling getting lifted/suspended. Is that possible? Sure. Perhaps the Chinese Spy balloon flying over our country will act like Halley’s Comet in ancient times (https://gizmodo.com/how-halleys-comet-sightings-changed-history-over-the-pa-5637815) and cause democrats and republicans to come together in unity this week to raise the debt ceiling. Unconvinced? Yeah me too. Given the political climate in D.C. presently, it seems much more likely it wont get resolved until the very last minute (sometime over the summer). And if it does not get resolved in the next two months than there is no way for Treasury to borrow that remaining 302b by end of March.

So assuming no debt ceiling increase and assuming the Treasury takes full advantage of its “bonus borrowing” due to “extraordinary measures”/accounting gimmicks available to it prior to 3/31. The TGA will not stay level from here (my only point of difference with Andy Constan’s tldr conclusions from his thread) but rather will decline to a level of roughly ~200b (maybe 175b as Ill explain below) at the end of March.

Other conclusions that follow from the analysis:

-          Treasury coupon issuance in Q1 will continue as treasury has projected (https://home.treasury.gov/system/files/221/TBACRecommendedFinancingTableQ12023-02012023.pdf) being unimpacted by the debt ceiling

-          Net treasury bill issuance in Q1 will NOT be the 655b projected by treasury for Q1 but rather ~353b due to debt ceiling constraints (representing the 302b gap identified in the analysis above). Through Thursday 2/2, Treasury has net borrowed ~250b in bills this quarter, so further net bill borrowing of only about ~103b over the next two months.

But…. will the Treasury make full use of its “bonus borrowing” available to it this quarter? I don’t think they will use every penny of it, but will get very close, maybe leaving 20-25b for use in Q2. Why wouldn’t they want to use all of their available “bonus borrowing” this quarter? Because if they do they might have a little trouble sticking to their projected coupon issuance for Q2 and I think they value sticking closely to that guidance.

Looking forward to Q2

But why would it be a problem in Q2, don’t they have another 168b in “bonus borrowing” coming up? Per the jpm analysis, yes. But the vast majority of it (143b) does not unlock until 6/30. Fortunately though, Treasury expects less net coupon issuance in Q2, only about 250b so after 180b in QT is taken into account Treasury is really only expecting to issue 70b in net new debt ceiling applicable debt in Q2. see (https://home.treasury.gov/system/files/221/TBACRecommendedFinancingTableQ22023-02012023.pdf). Furthermore, since that issuance is backloaded in the quarter to June, it turns out that the 120b of net new privately held debt from treasury issuance in April and May is entirely due to QT (thus debt ceiling netural). The mid-month June issuance may present a problem, though by then 17b of the 25b csdrf/psrhbf “bonus borrowing” will be available (maybe more than that, not sure on the details of how that accrues) and QT will likely account for ~18b of the 57.5. So Treasury well might need 20-25b in remaining borrowing capacity to meet that 6/15 issuance which is why I think they will save it from the “bonus borrowing” already available to them. The 6/30 issuance should be no problem since the 143b of “bonus borrowing” unlocking on that date should be available (and should also be sufficient to cover net new coupon issuance through July and maybe some of August which is probably right around the time that the TGA will become exhausted from the deficit)

Conclusion and Caveats

So summing it all up: I expect

6.       TGA level of ~175b at end of March

7.       Treasury will meet their coupon issuance schedules for Q1 and Q2 as projected and have room to do it within the “bonus borrowing” due to “extraordinary measures”

8.       Net treasury bill issuance of 328b in Q1 (78b between now and end of quarter)

9.       No Net treasury bill issuance in Q2 (Treasury will reserve the bonus borrowing to meet coupon issuance schedules)

10.   TGA level of ~150b at end of June (~50b in Treasury anticipated deficit for Q2 offset by 25b in “bonus borrowing” not used in Q1)

One big caveat here. A lot of this analysis depends on jpms quantification and timing availability of the debt ceiling “extraordinary measures”. To the extent they are wrong about any of it, so will this analysis be wrong

One second big caveat. This analysis (particularly my projected qtr end TGA balances) also depends on the accuracy of Treasury’s implicit deficit projections for this and next quarter.

One elephant caveat. In the unlikely event the debt ceiling does get lifted prior to 6/30 then this analysis becomes moot and probably best to just follow Treasury’s existing projections on bill issuance and end of qtr TGA cash balances.

And last caveat. I could misunderstand something or just plain be wrong. Take my analysis and sources of information for what they are and form your own opinion. I am confident enough in this analysis to put it on display in the public sphere but not as confident in the projections as I am for my QT projections month to month (particularly at this point with MBS settlement noise out of the system). So again form your own opinion.

So If you made it this far, a huge thank you for reading!

John