In the first warning sign that the US Treasury is burning through more cash than previously expected, at 3pm today the Treasury Department announced that in its latest forecast of end-of-September cash balance it anticipated only $60 billion of cash on hand, nearly half the $115 billion it forecast in its previous report in May, according to the Department’s marketable borrowing estimates. The treasury also expects to borrow $96 billion in net marketable debt in the current quarter, down from $98 billion forecast previously.

This drawdown in cash, and jump in government outlays, was to be expected following the latest Monthly Statement from the Treasury which showed a surge in government outlays, which hit a record high $429 billion in June, for reasons discussed previously.

However, the second, and more troubling warning sign was that in its initial forecast of calendar Q4 marketable borrowing needs, the Treasury now expects a near record $501 billion in net marketable debt to be issued from October through December. This amount will be nearly equal to the actual marketable debt borrowed in the last 4 quarters, which amounts to $527 billion. The full sources and uses can be found here.



Also, as shown in the chart below, this amount of upcoming quarterly issuance will be just shy of the previous record hit in the months of the financial crisis, and represents a dramatic change in the recent direction of declining borrowing.

Source: Reuters

One reason for this surge in Q4 debt issuancem coupld with the low level of borrowing in 3Q suggests the debt ceiling will be a “significant limiting factor on auction sizes” as it doesn’t allow for upsizes or provide space for new tenors, Jefferies economists Ward McCarthy and Thomas Simons write.

They also adds that the borrowing announcement suggests coupon sizes will increase in 4Q, since it’ll be difficult to put together “a feasible auction calendar” that increases borrowing by more than $500b “focused entirely in bills,”

Treasury said it expects to borrow $96b in 3Q, with quarter-end cash balance of $60b; expects to borrow $501 billion in 4Q, with quarter-end cash balance of $360 billion.

As a result, the borrowing projections reflect a “high degree of uncertainty regarding the timeline for Congress to address the debt ceiling."

The good news is that much of this debt will go toward building a cash cushion, as the projected debt needs are only $179 billion for the 4th calendar quarter, leaving an estimated $360 billion in cash as of December 31, 2017.

The Treasury also reported that in the April through June quarter, it issued $35 billion in net marketable debt, compared with its May prediction of $26 billion, and ended the quarter with a cash balance of $181 billion, down from the initial estimate of $200 billion. In April 2017, Treasury estimated net marketable borrowing of $26 billion and assumed an end-of-June cash balance of $200 billion. The increase in borrowing was driven primarily by lower receipts.