Funding America: Understanding the Treasury’s Strategy

Treasury Takes the Wheel

It’s a big week for market-relevant decisions coming out of Washington. For one, there’s the Federal Reserve’s interest rate decision later today. But that’s not all. Another event is drawing more eyes than usual.

The Treasury Department is set to unveil its funding strategy. With the Treasury yields at their highest level since the Global Financial Crisis, and the budget deficit widening, the Treasury’s borrowing plan is taking on particular significance.

The Fiscal Forecast

The Treasury announced Monday that it anticipates borrowing $776 billion in the last quarter of 2023, and $816 billion in between January and March 2024. But details of the new debt pile, including auction sizes, and whether the government will amp up its sales of longer-dated debt at the current high interest rates, are still up in the air. And the markets are eager to know more.

Refinancing Ripples

All of this is happening against the backdrop of higher interest rates.

Even though the Fed might be nearing the end of its rate hiking campaign, it has guided that rates will likely be higher for longer. That has led to a sell-off in longer-term Treasuries, propelling yields to their highest level since 2007, and implying higher borrowing costs for both consumers, and the government.

At the same time, the budget deficit is expected to increase by roughly $320 billion this fiscal year, due to both inflation and the higher interest rates that are meant to combat it.

If rates remain elevated, the deficit could continue to grow. The Treasury’s refunding decision will signal how the government plans to manage its ballooning debt.

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