With a tail of 5.3 bps, last Thursday’s 30-year bond auction was a reminder: rising bond issuance poses a systemic threat for markets. Primary dealers had to accept 24.7% of the issuance, more than double the 12% average over the past year. The bid-to-cover ratio dropped to 2.24, from 2.35 at the last 30-year auction. This is the fifth 30-year sale that came out weaker than expected. Deficits do matter and will continue to do so in 2024. Raising the share of T-bill issuance may ultimately backfire, until there is a credible commitment towards fiscal restraint. The only way to sustainably pin long-term rates is to tackle the underlying causes of the deterioration in the fiscal position. But this involves difficult political choices, for which there is little appetite.
To recap: without the effects of debt cancellation (and excluding the effects of timing shifts), the US deficit increased by nearly $1.1 trillion from FY22 to FY23, hitting $2.0 trillion (or 7.5 percent of GDP). Primary dealers have subsequently increased their deficit estimates for FY24 & FY25, relative to their July forecasts, according to the latest QRA. Dealers generally suggested that risks to borrowing were asymmetric to the upside.
The US economy is inevitably slowing. But many of the fundamentals remain solid. Nominal house prices continue to hit new highs, with US household net worth already at 570.1% of GDP in Q2. Households continue to deleverage, with liabilities as a share of GDP falling to the lowest since Q2 2001. Consumer credit delinquency rates have been climbing, but aggregate delinquency rates remain near secular lows, supported by a strong housing market. Household debt payments, as a share of disposable income, indicate little stress so far. The Federal Reserve’s Senior Loan Officer Survey showed a modest improvement in the last quarter too. Betting on a rally in Treasuries, on the logic that the US is about to enter recession, might be premature.
See also:
Primary dealer deficit estimates revised higher, November 7th 2023
Latest quarterly refunding announcement is myopic, November 2nd 2023
US federal budget deficit surged by $1.1tr in FY23, October 13th 2023
