Treasury refunding preview

Summary

The first Treasury refunding announcement of 2025 will offer a glimpse into how the United States Treasury is thinking through the fiscal outlook and federal government's financing need in the wake of the US election.

We project a federal budget deficit of $1.9 trillion in fiscal year (FY) 2025, a modest widening from the $1.8 trillion deficit registered in FY 2024.

We believe the end of the Federal Reserve's balance sheet runoff program, more commonly known as quantitative tightening (QT), is coming into view. We expect QT to run at its current pace through the end of May. Starting in June, we expect the Federal Reserve to keep the size of its balance sheet unchanged through at least the end of the year.

The looming cessation of Treasury security runoff and eventual return to Treasury security purchases should help keep the government's financing need relatively flat over the next year despite some growth in the federal budget deficit.

Current coupon auction sizes are raising enough money on a net basis that changes are unlikely to be announced at the February 5 refunding. We look for nominal coupon and floating rate note auction sizes to remain unchanged until the November refunding announcement.

If coupon auction sizes follow our projected path, we forecast that privately-held net coupon issuance will total $1.9 trillion in calendar year 2025, accounting for 93% of the privately-held net marketable borrowing for the year.

The debt ceiling is once again a binding constraint. So long as it is in effect, the Treasury General Account (TGA) will grind lower, and Treasury bill paydowns generally will continue unabated. We expect a debt ceiling resolution to be paired with the budget bill(s) that are enacted ahead of the March 14 funding deadline, long before Treasury risks a default.

Looking through the debt ceiling noise, we project net T-bill issuance of $140 billion in 2025. T-bills as a share of the Treasury market will likely drift lower over the next couple of years even if coupon auction sizes are left unchanged until late this year.

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