The U.S. Treasury, led by Secretary Steven Mnuchin, announced a record-setting $112 billion in quarterly debt issuance. The new bills, which will cover a wide maturity window, should rise to $132 billion by October.The new issuance pushes the total budget deficit past levels seen during WWII when debt reached 106% of GDP. As the COVID crisis deepens, lawmakers continue to require the Treasury to make up for losses and multiple stimulus packages, forcing increased debt. Predictions indicate that the total could reach an enormous 117% of GDP before 2025.
The Broadening Array of MaturitiesThe new offerings will shift focus away from the Treasury’s normal go-to: the 10-year maturity note. Instead, according to the announcement, the maturities will range from 7 to 30-year notes. Per the announcement:
“Treasury will continue to shift financing from bills to longer-dated tenors over the coming quarters, using long-term issuance as a prudent means of managing its maturity profile and limiting potential future issuance volatility.”The broadening array for note maturity indicates an awareness by the Treasury that the 10-year market has been overrun. The Federal Reserve (Fed) is, in fact, still committed to buying as much as $80 billion per month of Treasury debt as a stop-gap measure.
Stimulus PaybacksA new stimulus package is also in the works, and will likely see approval by Friday. Senate Republicans are seeking a $1 trillion price tag, while Democrats request another $3.5 trillion. These sums will undoubtedly be added to the already exploding Fed balance sheet. The total now stands in excess of $7 trillion. This, with the potential for a substantial stock correction, is fueling fears of heavy inflation moving forward.
Silver Lining?Interestingly, the newest announcement did have a positive effect on the overall interest rate for 10-year notes. Those rates increased slightly, bringing them above negative real interest rates. The real interest rate is calculated by subtracting the yield on the bill from the expected inflation rate. Real interest on T-bills had been negative, and the current change makes them slightly less so.
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