The US Treasury’s quarterly financing estimates due next week will be closely watched to gauge the department’s view on how the debt-ceiling drama will unfold.
(Bloomberg) — The US Treasury’s quarterly financing estimates due next week will be closely watched to gauge the department’s view on how the debt-ceiling drama will unfold.
The Treasury on Monday will release estimates for federal borrowing and cash balances through March and the key April-June period as it includes the tax collection deadline and the estimated end of measures used to remain under the debt ceiling. Treasury Secretary Janet Yellen last week informed Congressional leadership that Treasury has deployed a series of special measures to prolong its borrowing authority under the cap.
The Treasury’s financing and cash balance estimates help strategists determine how much bill supply they should expect, which is especially challenging during the debt-ceiling episode when the swings in supply are expected to be steep and swift. A higher cash balance could hint at a resolution to the debt ceiling and a deluge of T-bills, which investors have been demanding for years. But a lower level could indicate analysts should be penciling in more cuts and a prolonged standoff over the cap.
While the forecasts have a history of being wildly inaccurate, this time may be different as the current debate in Congress could prompt a more conservative approach. Still, Mark Cabana, head of US interest rates strategy at Bank of America Corp., is skeptical given the track record.
“Treasury has to be somewhat delicate about the signals that they send around the cash balance and they don’t want to send a signal that suggests the outcome of the debt ceiling one way or the other,” Cabana said. “The market knows that and will take those estimates with a grain of salt and probably discount them more so than usual, even though Treasury has a history of not being accurate when it comes to the cash balance.”
Wall Street strategists in recent quarters have been more vocal about what they consider to be Treasury’s inaccurate forecasts, especially after the last round when it was evident the government was closing in on the $31.4 trillion limit and would need to take actions to remain under the limit. The cash balance was about $447 billion on Dec. 30, versus Treasury’s estimate of $700 billion, a roughly $253 billion miss.
Because the cash balance is expected to be a wild card, other market participants are instead more focused on borrowing estimates.
Wrightson ICAP economist Lou Crandall said in a note to clients Jan. 23 that the firm assumes Treasury will borrow about $465 billion in the January to March period, with a cash balance of $120 billion at the end of March, and $230 billion of borrowing in April to June time frame with a cash balance of $145 billion on June 30.
At the last refunding, Treasury said it expected to borrow $578 billion in the current period, assuming an end-March cash balance of $500 billion, while noting that the estimate assumed the enactment of a debt-limit suspension or increase.
Financing estimates are “still important,” said economist Michael Pugliese at Wells Fargo & Co. “Cash balance assumptions get a lot of attention, but the borrowing estimates are useful because it gives us a window as to how Treasury is thinking about cash flow.”
At the same time, House Republican leaders are considering proposing a short-term extension of the federal debt ceiling to delay the risk of a default until Sept. 30. The plan would kick the can down the road and further muddle the Treasury’s financing outlook, making the path to a resolution more treacherous.
“This looks to only be under consideration and is actually rather problematic,” said Gennadiy Goldberg, a strategist at TD Securities. “Linking the debt ceiling and funding is difficult first because Treasury’s extraordinary measures will reset, which makes it hard to actually link the two issues properly, and because linking the debt ceiling and funding could create a more dangerous standoff later in the year.”
–With assistance from Matthew Burgess.
(Adds talks of extension proposal, analyst comment beginning in penultimate paragraph.)
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