Treasury bond issuance could reach record highs in 2024, Bank of America said.
Analysts raised their estimate for the supply of longer-dated debt that’s on the way.
“A daunting supply picture becomes even more challenging given the backdrop of higher financing costs.”
Treasury bond issuance could reach a record high in 2024, as elevated interest rates will aggravate US deficits, Bank of America said in a Wednesday report.
That prompted analysts to raise their estimate for the supply of 10-year equivalents to be around $1.34 trillion, or $90 billion higher than previously estimated.
“Higher interest rates will likely have a meaningful impact on deficit spending and result in larger UST issuance, creating a spiral effect. Rates will have to materialize more than 100bps below forwards for costs to not rise materially as a share of GDP,” the analysts wrote. “A daunting supply picture becomes even more challenging given the backdrop of higher financing costs.”
With the $1.7 trillion deficit of fiscal year 2023 topping expectations, BofA adjusted its outlook for future years: between 2024 and 2026, deficits will steadily climb from $1.8 trillion to $2 trillion.
Meanwhile, net interest payments will account for an increasing share of GDP, climbing to a record 3.5% in 2026.
While solutions such as tax hikes and spending cuts have long been touted as necessary to fix this, BofA analysts note that these aren’t easy options for lawmakers to implement.
More likely, it’ll remain the Treasury Department’s mandate to keep issuing debt, further expanding the $25.8 trillion market.
“We now expect a repeat of the increase in auction sizes observed at the August refunding next week, followed by moderating increases at the February and May refundings,” analysts wrote. “Per our forecasts, this results in auction sizes rising to historic highs across all tenors besides the 7y and 20y.”
Assuming the Fed extends quantitative tightening, this increased Treasury issuance will push the ex-Fed 10-year bond supply to an all-time high next year of $1.53 trillion, BofA estimated.
The Treasury Department has already indicated readiness to amplify auctions, with the latest borrowing plans set to be released November 1.
“Further gradual increases in coupon auctions sizes will likely be necessary in future quarters,” Josh Frost, assistant secretary for financial markets at the Treasury, said in September.
Growing supply could continue pressuring yields up, with recent Treasury bond auctions already seeing signs of dampened demand, causing rates to hit 16-year highs.
The supply-demand imbalance has set off alarms from key market commentators, with Ray Dalio and Bill Gross warning about the need for higher interest rates if the Treasury wants to find buyers.
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