US banks predict surge in Treasury borrowing

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The big banks responsible for underwriting the US government’s debt have predicted a surge in borrowing from the US Treasury in order to fund the Trump administration’s proposed infrastructure spending plans.

In minutes released this morning from the Treasury Borrowing Advisory Committee meeting held on Tuesday, acting deputy assistant secretary Fred Pietrangeli noted that primary dealer estimates for full-year 2017 through to full-year 2019 were “significantly higher” than estimates from the Congressional Budget Office, report Joe Rennison and Robin Wigglesworth in New York.

“These primary dealer estimates reflect a substantial range of market expectations around fiscal policy, particularly with regard to the timing and size of various stimulus and tax proposals,” said the minutes.

The US Treasury also warned in a separate statement that came out alongside the TBAC minutes about the impending debt ceiling coming up on March 15 – which would prevent the US government from increasing spending unless Congress votes to increase the limit.

The ceiling has already resulted in the US Treasury reducing the number of short-dated “bills” it issues despite expectations that the Republican-controlled Congress will raise the ceiling to allow President Trump to push ahead with his infrastructure projects.

Extraordinary measures allow the government to finance its needs on a temporary basis after March 15 without Congress increasing the limit. Mr Pietrangeli added that the Treasury’s own borrowing estimates for the third quarter of 2017 assume a $200bn cash balance at the end of June, “which also reflected an assumption that debt limit-related constraints would remain in effect,” according to the TBAC minutes.

The minutes also discuss the Fed winding down its long-running bond buying programme, with the December survey of primary dealers predicting the Fed will keep reinvesting proceeds from its portfolio into the market until June 2018.

Once it does decide to stop re-investing, “Treasury would likely need to increase the amount of borrowing from the public,” said Mr Pietrangeli, according to the minutes.

Because of the potential disruption to both the Treasury and mortgage-backed security market – the Fed’s $1.74tn MBS portfolio constitutes nearly a fifth of the entire market – most analysts expect a very gradual end to its reinvesting, rather than an abrupt end.

Indeed, some analysts still think that despite the recent chatter by some Fed officials, US policymakers are likely to keep reinvesting the proceeds of its bond holdings for the forseeable future.

“Because of uncertainty about how markets would respond to an earlier end to reinvestments, we expect the (Fed) to approach any changes to its balance sheet plans very cautiously,” Zach Pandl, a Goldman Sachs economist, wrote in a note.

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