Lower U.S. Treasury Issuance in 2016, but Federal Reserve Clouds Outlook

The 2016 U.S. federal deficit is projected at (2.5%) of GDP. This would be the lowest budget deficit under President Obama, and below the long-run average of (3.1%) for prior presidential administrations. The improved deficit picture is a combination of continued budget sequestration and a better fiscal outlook. The projection implies that U.S. Treasury issuance of bills and notes will decrease in 2016. The primary dealer community, which is obligated to bid at Treasury debt auctions, estimates net issuance will fall 27% in 2016. The consensus forecast is $418 billion of net Treasury supply, which would be the lowest since 2008. Over the last few years, the U.S. Treasury has locked in lower rates of financing by extending the average maturity of its debt to 5.8 years from 4.1 years. One consequence of longer maturity debt has been a 10% drop in T-bills – debt maturing in less than one year. This trend is expected to reverse in 2016, as the U.S. Treasury builds cash reserves and as post crisis financial regulation increases demand for ultra-safe short-term debt from domestic financial institutions and investors. Clouding the outlook is the Federal Reserve’s $2.5 trillion Treasury portfolio, which it accumulated during its multiple QE programs. It is estimated that $216 billion in Treasuries will mature next year and that the Federal Reserve will continue its policy of reinvesting maturities back into Treasuries. Barclays’ “balanced” Treasury market outlook sums up the consensus forecast best. SNWAM would largely agree that the Treasury market looks balanced, as reduced supply and more T-bill issuance will be absorbed by domestic financial institutions and investors, even as the Federal Reserve steps back from the extraordinary measures it has taken to support the U.S. economy.

Sources: Whitehouse.gov, Federal-budget.insidegov.com, Bloomberg.com – There’s a Big Drop in U.S. TSY Debt Supply Coming in 2016, Barclays and SNWAM Research