Treasury Drops Q2 Borrowing Estimates Monday With a Bigger Refunding Statement Coming May 4

The U.S. Treasury Department is set to release its second quarter marketable borrowing estimates on Monday April 27, the start of a roughly week long stretch that bond traders have circled on the calendar for months. The fuller quarterly refunding statement, which lays out the actual auction sizes for two year, three year, five year, seven year, ten year, and thirty year securities, follows on Wednesday May 4. Treasury also publishes a buyback schedule and minutes from the Treasury Borrowing Advisory Committee meeting in the same window. Together those documents tell investors how much new debt the government plans to issue between July and September and whether coupon auctions are about to grow.

The framing matters because Treasury entered the year still leaning heavily on short term bills to fund the deficit. In the January through March quarter, Treasury estimated it would borrow $574 billion in privately held net marketable debt, assuming an end of March cash balance of $850 billion. The April through June estimate was much lower at $109 billion, with an assumed end of June cash balance of $900 billion. The lower spring number reflects the seasonal bump from individual income tax receipts in April rather than any change in trajectory for the federal deficit.

What investors are watching now is whether Treasury will signal a coming shift toward more longer dated coupon issuance for the third quarter. Treasury officials have stated for the last three quarters that auction sizes for nominal coupons would hold steady, language that bond traders have come to read as a green light to keep buying duration without fear of supply pressure. Any change in that wording at the May 4 statement would move yields. The ten year Treasury closed last week near 4.30 percent, a level that has held in a narrow range despite ceasefire talk in the Middle East and softer than expected April inflation data.

The political backdrop adds another layer. Speaker Mike Johnson and the House are still working through the second budget reconciliation package, which includes additional Department of Homeland Security funding and a broader set of tax provisions. The Congressional Budget Office has not scored the final version, and Treasury financing decisions for the back half of the year will partly depend on what passes. If reconciliation closes with larger near term spending, Treasury could be forced to grow auction sizes by the November refunding even if it holds them steady in May. Markets are pricing in roughly a 13 percent chance of a Federal Reserve rate cut at the FOMC meeting Wednesday April 29, with a higher probability of a cut at the June meeting.

The Treasury Borrowing Advisory Committee, made up of senior bank and asset manager representatives, met in early February and recommended that Treasury continue to bring T-bill issuance down toward 20 percent of total outstanding debt. T-bills currently make up around 22 to 23 percent of the marketable Treasury market, above the historical norm of 15 to 20 percent. The committee has been pushing for a gradual normalization that would shift more issuance into coupons over time. The May 4 statement is the next chance for Treasury to lay out a path.

Foreign demand has held up better than many analysts feared at the start of the year. Indirect bidder participation, often used as a proxy for foreign central bank and sovereign wealth fund interest, has been strong in two year, five year, and seven year auctions through April. Japanese and European investors have continued to show up despite hedging costs that turn the nominal yield negative for many of them. China has slowed but not stopped its accumulation of Treasuries through Belgian and Caribbean custody accounts. The May refunding will provide the next read on whether that pattern holds.

Inflation data complicates the picture for Treasury. The March personal consumption expenditures price index, the Federal Reserve's preferred inflation gauge, is set for release Thursday April 30. Consensus estimates are for headline PCE around 2.7 percent year over year and core PCE near 2.8 percent. Both readings would be above the Fed's two percent target but consistent with the slow disinflation trend the FOMC has cited in recent meetings. The Treasury market typically reacts more to the core figure, particularly the three month annualized run rate, which has been hovering near three percent.

For everyday households, the practical impact of the refunding announcement is limited but real. Mortgage rates closely track the ten year Treasury, and the thirty year fixed has been bouncing between 6.30 and 6.50 percent through April. A clear signal that Treasury will hold coupon sizes steady through the summer would help anchor the long end and keep mortgage rates from drifting higher. A signal in the other direction would push them up. Auto loan rates, credit card rates, and small business lending rates all move with the same plumbing, even if the connection is less direct.

The bigger question hanging over the May refunding is what happens once Federal Reserve Chair Jerome Powell's term ends in May. Treasury officials have not commented publicly on the transition, but the next Fed chair will inherit a balance sheet runoff that has slowed to roughly $40 billion per month in Treasuries. How that runoff is paced through the summer will affect how much additional supply Treasury needs to bring to market. The answer to that question begins to show up in the documents Treasury releases over the next eight days.