GS: Dimming Fiscal Prospects Portends Large Drop In Outstanding

Goldman Sachs note that "odds of a Phase 4 stimulus package have been declining, with under a month left for an agreement between the two parties before the election. Our economists see a deal as a close call, but as more likely than not by end-September. Further, if passed, they expect the aggregate size to be closer to $1tn, smaller than the 1.5-2tn package they previously expected. These developments present downside risks to our issuance projections - we had been assuming a $1.5tn package in our funding estimates; a smaller (or no) deal will mean Treasury's funding needs for the calendar year will be lower by about $300bn-$800bn when compared to our previous estimates. While Treasury can bring year-end cash balances down to about $500bn by keeping our projected auction calendar for coupon securities and simply holding bills outstanding at current levels (i.e., zero net bill supply for the rest of the year), a "no deal" outcome would likely allow for substantial bill drawdowns. Even if Treasury targeted an elevated $800bn year-end cash level, we estimate bills outstanding will have to fall by about $150bn, making 4Q20 one of the larger negative net bill issuance quarters over the past two decades. Of course, Treasury could choose not to increase coupon auction sizes at the November refunding in the event of no deal, but that would not move the needle by much (net issuance would be only $36bn lower versus our current projections). The negative supply hasn't thus far been offset by a drop in money fund AUM. Though overall AUM has been declining by an average of $20bn/week, bills appear to be benefiting from reallocation flows. On net, this would imply relative richening of bills versus other front end rates."