Can you connect the dots? No one in Washington seems to be willing to make the effort.
On a day when the Federal Reserve said it would cut its benchmark interest rate by 25 basis points and end its efforts to sell some of the bonds in its own portfolio two months ahead of schedule–both acts that will stimulate the economy–the U.S. Treasury announced that it would continue its sales of debt at record levels to fund a mounting annual budget deficit. The spending that fuels that deficit is, of course, also stimulus to the economy.
If we can’t get 3% growth out of this tsunami of stimulus, you might suspect that there’s something wrong at the core of the U.S. economy. The new budget deal up for a vote in the Senate this week will push the annual budget deficit over $1 trillion for fiscal 2019. The budget deficit was a paltry $779 billion in fiscal 2018. (The federal government’s fiscal year starts on October 1.)
In a quarterly funding announcement today the Treasury said it will sell $38 billion of three-year notes on August 6, $27 billion of 10-year notes on August 7, and $19 billion of 30-year bonds on August 8. This level of issuance tops previous records set in 2009 when the Federal Reserve was flooding the economy with cash to help the country recover from the Great Recession.
The Treasury also said it plans to borrow more than twice as much as previous anticipated in the third quarter, assuming the Senate votes to lift the debt ceiling this week, in order to make up for a backlog of borrowing deferred as Treasury ran up against the debt ceiling. The department plans to issue $433 billion in net debt from July through September, $274 billion more than it estimated in April.
Part of that increase in debt sales will come from the sale of short-term bills that will help the Treasury bring its cash balance, drawn down as Treasury ran up against the debt ceiling, back to $350 billion.
At a briefing on Wednesday a Treasury official said that the department doesn’t expect the increase in the sale of short-term bills to disrupt money markets since primary dealers have told the Treasury that money market buys can handle the projected $160 billion in net bill sales without a problem.
It will be “interesting” to see if bond buyers demand higher yields before they swallow this load of new debt–and to see how any demand for higher yields plays out with the downward pressure on yields implicit in the Federal Reserve’s interest rate cuts.
I also wonder if a failure of the Fed’s short-term interest rate cuts to lower Treasury yields pumped higher in order to meet bond buyers’ demands would then put more pressure on the Fed to cut interest rates again.
Watching how the forces for higher and lower yields net out would be fascinating in simulation. It’s a bit less fascinating and a bit more worrying since this “experiment” is playing out in the real economy in real time.