Lower Borrowing Ests Shouldn't Alter Coupon Upsizing Much (1/2)

Treasury's announcement Monday that it projected $760B of net borrowing in the Jan-Mar quarter (a drop of $55B from the previous est) followed by $202B for the Apr-Jun quarter represented a downside surprise, on the order of $250-300B for the two quarters compared to the analyst expectations we'd seen.

• Overall there is no obvious impact on expectations for coupon upsizings at Wednesday's refunding announcement - though it probably reduces the chances of upside surprises. The consensus expectation is in the table below and analyst expectations haven't changed since yesterday.
• The sharp drop in net borrowing for Q2 mostly reflects the large annual tax take in April. The downside surprise will manifest itself primarily in even more sharply net negative T-bill issuance ahead, though the impact on coupon issuance is less certain. It also excludes potentially deficit-widening tax legislation, though the impact on net public borrowing could be offset by a QT taper if the Fed initiates that soon.
• The borrowing requirement isn't always a clear guide to what the Wednesday refunding announcement will bring, though the relief seen in the Treasury market after the figures were released was understandable. Recall it was the surprisingly high net marketable borrowing estimate in August 2023's refunding round that sparked concern that coupon issuance would be substantially increased (the figure eclipsed $1T, up $274B from the assumption made a quarter earlier and well above sell-side estimates of $800-900B).
• That was in turn partly due to a higher cash balance target after the debt limit was lifted earlier in the summer. In yesterday's announcement, Treasury forecast no increase in the end-quarter cash balance through end-June at $750B, versus some expectations that it would reflect an increase of $50B or more. That means no need to increase borrowing to increase the TGA cash pile.
• Aside from the steady cash balance, the SOMA redemptions of $197B forecast for Apr-Jun were above the usual $171-172B, in line with some estimates (incl Deutsche Bank) which noted that could result from a timing shift in coupon settlements. All else being equal, a higher SOMA figure increases the requirement to borrow from the public.

Source: MNI