Investors have been focused this week on a routine quarterly announcement about how the government plans to finance itself, a sign of how sensitive Wall Street is to a rapid rise in interest rates.
On Wednesday, the Treasury Department said in its latest “refund” announcement that it would issue an increased amount of short-term debt by the end of this month. The company previously said it planned to borrow $776 billion in the final three months of the year, more than it ever did in the fourth quarter, to keep up with government spending and rising interest payments.
The move is likely to be welcomed by investors as a Treasury industry advisory group urges the ministry to keep short-term issuance high as it could help ease some of the pressure on longer-term bonds, which has surged recently to decrease months.
The 10-year Treasury yield, which underpins a wide range of consumer and business interest rates, fell sharply after the Treasury announcement, while the S&P 500 stock index rose. These moves were then pushed further throughout the day as investors digested the Fed’s decision to leave its own key interest rate unchanged. Investors were still preparing for the release of key jobs data on Friday.
The Treasury announcement has attracted widespread attention as a sharp rise in interest rates has pushed up the cost of national debt. The benchmark 10-year Treasury yield, which measures what the government pays to borrow money for a decade, had risen three-quarters of a percentage point since early August, when the Treasury Department last updated markets on its borrowing plans Decline on Wednesday.
That increase was tied in part to investors’ concerns about the government’s $33 trillion debt pile, particularly given the costs of maintaining it after the Federal Reserve raised interest rates to their highest level since March 22 years. The federal deficit rose $320 billion to $1.7 trillion in the year ended Sept. 30. Rising interest costs accounted for about half of that increase.
Ahead of Wednesday’s refund announcement, Ajay Rajadhyaksha, head of research at Barclays, said the Treasury report was “a pivotal moment for markets” and expected a move to issue more short-term notes and notes would be welcomed by investors it has so far found it difficult to absorb recent sales of longer-term debt.
The Treasury said on Wednesday it would still increase the size of longer-term debt auctions – which was expected given the amount the government wanted to raise – but by slightly less than the composition of the Treasury’s Credit Advisory Committee of bankers and investors had recommended.
While the Treasury expects a “modest reduction” in short-term debt issuance in December, Treasury officials said debt issuance would likely remain above a soft target of 15 to 20 percent of total debt next year.
Benjamin Jeffery, interest rate strategist at BMO Capital Markets, said he expects the refund announcement to investors will take precedence over the Fed’s decision on interest rates, which is typically the most important market event when it occurs.
“The market is very focused on refunds,” he said, noting that the August announcement accelerated the rise in yields.
The last time the benchmark interest rates for government borrowing were as high as they are today was in 2007. At that time, national debt was around 60 percent of gross domestic product; It is now more than 100 percent.
Investors and analysts are worried about who will continue to lend to the government. Some large foreign investors such as China have already reduced their government bond holdings. Lower demand and greater supply of debt could push interest rates even higher.
“In fact, while there is still reasonable demand for U.S. Treasury securities from many domestic and international market participants, it has not kept pace with the increase in supply,” the advisory committee’s report to the Treasury said.
The rapid rise in yields is not only impacting the cost of government borrowing, as the 10-year Treasury yield also underpins interest rates on corporate bonds, consumer mortgages and many other types of debt around the world.
The shrinking US government bond holdings are also contributing to investor concerns, effectively eliminating the central bank as a buyer. And just as the Treasury pays higher interest rates on loans, the Fed must pay higher interest rates on the money banks keep at the central bank.
“The interest rate law is only going in one direction over the next few years,” said Brad Setser, a senior fellow at the Council on Foreign Relations.
Although the Treasury Department’s fourth-quarter borrowing forecast is a record, it is still $76 billion below what was expected three months ago, largely due to delayed tax revenues. It’s also less than the $1 trillion the government borrowed in the third quarter.
“Given the significant uncertainty surrounding the economy and projected borrowing needs, Treasury must remain flexible in its approach,” the advisory committee’s report to Treasury said.
Alan Rappeport contributed reporting.