Treasury refunding preview

Summary

We do not expect any major policy shifts at the upcoming quarterly refunding announcement from the U.S. Treasury. In our view, existing gross coupon auction sizes are raising enough money that changes are unlikely to be announced until the January 2026 refunding.

Our forecast for the federal budget deficit in fiscal year (FY) 2025 is $1.70 trillion. If realized, this would be a modest narrowing from the $1.83 trillion budget deficit recorded in FY 2024. Robust spring tax collections and an anticipated increase in tariff revenues are the main factors driving the near-term deficit narrowing in our forecast.

We expect the federal budget deficit to widen to $2.0 trillion in FY 2026 as the result of a weaker U.S. economy, structural growth in federal spending and new tax cuts.

We look for the Federal Reserve's quantitative tightening (QT) to run at its current pace through the end of the year and then cease. The era of QT putting additional pressure on Treasury's auction sizes is slowly coming to a close, and this will help delay the next round of coupon auction size increases.

We are shifting our debt ceiling "X date" forecast from early August to early September. There is still considerable X date uncertainty given the clouded outlook for the U.S. economy and trade/fiscal policy. A more pessimistic scenario would place the X date toward the end of July, while a more optimistic outcome could push the X date into October.

Once the debt ceiling has been lifted, net T-bill supply will surge as Treasury replenishes its cash balance and resumes normal operations. We project net T-bill supply will total a bit more than $500 billion over the second half of the year.

That said, it is important to remember that this surge in supply will reverse the reduction in Treasury bills outstanding that took place in the first half of the year. On an annual basis, we expect net T-bill supply to be roughly flat for the year.

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