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U.S. Fiscal Outlook: Deteriorating Before Our Eyes?

Isaac Nuriani    |
Nov 10, 2023
  • Treasury borrowed $1 trillion in the third quarter alone.
  • America’s most reliable debt investors now buying less debt.
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Will 2023 prove to be one of the most fiscally momentous years in U.S. history?

Coming right out of the gate in January, the federal debt ran up against the debt ceiling, which at the time was $31.4 trillion. A months-long and highly combative back and forth ensued between Democrats and Republicans…one that wasn’t finally resolved until the very beginning of June and just a few days before “X Date,” when the government would have had no choice but to begin defaulting on its obligations for the first time in history.[1]

Then there was the matter of the resolution itself, which was anything but inspiring. After all that time and energy spent hacking away at a deal, the best Democrats and Republicans could do was to agree to simply suspend the debt ceiling until early 2025 in exchange for a relative handful of spending cuts.[2]

Two months after the debt-ceiling agreement was reached, Fitch Ratings decided it had seen enough and took the extraordinary step of slashing America’s credit rating from AAA to AA+.[3] It was only the second time in history (although the second time in a little over a decade) the nation’s credit rating had been cut.[4]

That already was plenty of fiscal “action” for the year. But as it turns out, there was much more to come.

Next up was the down-to-the-wire scrambling necessary to avoid a government shutdown over politically driven differences in funding priorities at the onset of fiscal-year 2024. The shutdown was successfully averted, but only by way of a stopgap measure that keeps the lights on in Washington through November 17 – which means the possibility of another shutdown looms large right now.[5]

Oh…and there was this: The path to reaching an agreement on the September 30 stopgap bill proved so contentious that Kevin McCarthy ultimately was removed as House speaker – the first time in U.S. history that had happened.[6]

We still weren’t done yet. A few weeks ago, the Treasury Department informed us the budget deficit for fiscal-year 2023 reached $1.7 trillion – the third-biggest budget deficit in history; this despite the fact that the COVID crisis had passed and the economy seemed to be growing.[7]

In terms of fiscal upheaval, it’s difficult to remember a bigger year. But as much as it is, none of that…even all of it together…may not be the biggest U.S. fiscal story of 2023.

You probably have heard Treasury yields have been rising recently. They have, in fact, been rising so sharply of late that the increase has made it unnecessary for the Federal Reserve to manually raise interest rates any further on behalf of the nation’s fight against inflation.[8]

Most experts seem to agree that a general increase in fiscal uncertainty – certainly evident this year – effectively has mandated that investors receive a bigger payout for buying a share of the nation’s debt. But a closer look at the details of the rise in yields may shed important light on

Yields began charging upward around the end of July…not long after a stunning announcement by the Treasury Department about how much money it would need to borrow in the third quarter.

And since then, there have been subsequent announcements from Treasury about how much it expects to borrow in Q4 and Q1 2024 that are about as stunning.

In other words: Against the backdrop of a year that, through summer, had already exemplified the nation’s chronic fiscal irresponsibility, the Treasury Department essentially declared that none of it mattered; that no matter how topsy-turvy the nation’s fiscal house looked – and is – that spending well beyond its means will continue for at least the foreseeable future.

And with those declarations, it seems the nation may finally have arrived at least the very beginning of its potential descent into genuine fiscal unsustainability.

Treasury Continues to Borrow at a Furious Pace

You’d think the fiscal-year 2023 $1.7 trillion budget deficit in a year absent bona fide, large-scale crises and characterized by economic growth would have been the proverbial fiscal straw that broke the camel’s back in terms of rattling investors and driving bond yields upward.

But it wasn’t that – not exactly.

As the Wall Street Journal’s Eric Wallerstein notes, it was an announcement made at the end of July by the Treasury Department that it planned to borrow $1 trillion in the third quarter.[9]

$1 trillion…in just the third quarter.

For a single quarter unmarked by war or some other catastrophe which might reasonably justify that kind of sudden lurch into deeper indebtedness, $1 trillion is nothing short of extraordinary. Making it even more surprising is that the figure is roughly $274 billion more than the amount Treasury said just two months earlier they’d need to borrow in Q3.[10]

And there’s going to be plenty more borrowing where that came from, according to Treasury. The department expects to borrow another $776 billion in the fourth quarter.

The figure is actually $76 billion less than what Treasury originally said it would need to borrow in Q4. I suppose that’s a good thing. It’s less than Wall Street estimates, as well. J.P. Morgan, for example, said they were looking for Treasury to borrow around $800 billion in Q4.[11]

But perhaps lost among all the sighs of relief over the fact that the figure is actually less than originally projected is that it’s still the most ever borrowed in a fourth quarter.[12] So, there’s that.

And during the same announcement in which Treasury revealed its Q4 borrowing needs, the department also announced it expects to borrow $816 billion in the first quarter of 2024. For borrowing in the first quarter, that, too, would be a record.[13]

Investors and yields have been so on edge since the July 31 announcement that $1 trillion in borrowing would take place in Q3 that yields actually dropped briefly following the announcement that less borrowing in Q4 would be needed. But only briefly. They rebounded shortly thereafter.[14]

Which isn’t a surprise. Because the reality is that all this borrowing…$1 trillion in Q3 and record sums in the two subsequent quarters…can be subject to only so much spinning.

“You can discern a change in the bond market from the Treasury announcement and the big step up in supply, which was the real problem for bond yields,” suggests Quentin Fitzsimmons, a senior portfolio manager at US asset manager T Rowe Price.[15]

Right now, in real time, against the backdrop of a year that has seen so many signs of fiscal carnage already, the federal government is moving full speed ahead with record levels of borrowing. And all of that borrowing most certainly will continue pushing deficits – and the national debt – further into their respective stratospheres.

Yields, of course, are rising, as well, as investors expect to be paid for buying the debt of a nation in such fiscal disarray. But that’s not the only change we’re seeing. Some of the nation’s historically largest investors in its debt are showing signs of buying fewer of those obligations regardless of the interest paid. Is it possible that conditions are becoming so uncertain that investors may decide to lose interest in buying the debt altogether?

Japan, China Balking at U.S. Debt

Earlier explanations notwithstanding, analysts largely seem to agree now that much – if not all – of the reason for rising bond yields is attributable to recent, acutely higher concern on the part of investors that the nation’s fiscal position is becoming increasingly untenable.

In the assessment of Jim Cielinski, chief investment officer for fixed income at Janus Henderson, “The unsustainability of the fiscal framework is probably the biggest factor in driving this fear of bonds.” Cielinski adds that “supply is shifting up at the same time as demand from price-insensitive buyers has dissipated — most noticeably from central banks.”[16]

There don’t seem to be any signs that the government intends to take meaningful steps to rein in any of its spending, either. We’ve already discussed the real-time borrowing – enormous sums, by any measure – that Treasury is committing to through the near term.

As it is, the $1.7 trillion 2023 budget deficit landed at 6.3% of GDP…a significant increase over 5.4% in fiscal year 2022.[17] Excluding World War II, the financial crisis and the COVID-marked years of 2020 and 2021, the deficit-to-GDP ratio has never been higher statistically.[18]

Looking ahead, the picture appears to grow darker. Projections of the 2024 deficit-to-GDP ratio are well over 6%, as well.[19] Additionally, the nonpartisan Congressional Budget Office forecasts the size of the average annual budget deficit from 2024 through 2033 will be roughly $2 trillion.[20]

It appears that investors have taken this all in and are getting the message. Some of America’s historically biggest foreign buyers of her debt are acquiring less of it…and doing so at a time when the U.S. has no choice but to try to package and sell even more of that debt as the deficit soars.[21] As for numbers, the Financial Times notes that the Treasury holdings of Japan – the biggest foreign investor in U.S. debt – fell by 6% over the year through August. The Times also points out that China’s level of U.S. Treasury ownership has fallen by 14% since August.[22]

To be sure, Japan and China together still own 8% of all U.S. debt. But some may see it as revealing that in 2007, the two nations combined own roughly 25% of America’s total debt.[23]

For that matter, the Federal Reserve isn’t buying Uncle Sam’s debt the way it used to, either, as it continues the effort to reduce the inflationary impact generated by years of quantitative easing dating back to the financial crisis.[24]

“We’re now beginning to see the real-life effects of an unsustainable federal debt load,” writes financial journalist Rick Newman. “To finance trillions of dollars in spending beyond what incoming revenue can support, the US Treasury is now issuing more debt in the form of Treasury securities than global financial markets can readily absorb.”[25]

Should that continue, everyone concerned – which is everybody, really – must at least consider this possibility: that the U.S. right now is in the process of arriving at the fiscal “point of no return” which so many once seemed to assume would never actually be reached.

[1] Scott Ward, U.S. News & World Report, “U.S. Debt-Ceiling Deal: What Investors Should Know” (June 2, 2023, accessed 11/9/23).
[2] David Lawder and Andy Sullivan, Reuters.com, “Debt ceiling deal ignores US debt time bomb” (June 5, 2023, accessed 11/9/23).
[3] Fitch Ratings, “Fitch Downgrades the United States’ Long-Term Ratings to ‘AA+’ from ‘AAA’; Outlook Stable” (August 1, 2023, accessed 11/9/23).
[4] Christopher Rugaber, AP News, “Fitch downgrades US credit rating, citing mounting debt and political divisions” (August 1, 2023, accessed 11/9/23).
[5] Kaanita Iyer, CNN, “The government remains open – for now. Here’s what happens next” (October 1, 2023, accessed 11/9/23).
[6] Moira Warburton, Richard Cowan and David Morgan, Reuters.com, “Kevin McCarthy ousted as House Speaker in historic vote” (October 4, 2023, accessed 11/9/23).
[7] David Lawder, Reuters.com, “US budget gap soars to $1.7 trillion, largest outside COVID era” (October 20, 2023, accessed 11/9/23).
[8] Christopher Rugaber, AP News, “2 Federal Reserve officials say spike in bond yields may allow central bank to leave rates alone” (October 9, 2023, accessed 11/9/23).
[9] Eric Wallerstein, Wall Street Journal, “Treasury Borrowed Over $1 Trillion in Q3; Another $776 Billion Expected in Q4” (October 30, 2023, accessed 11/9/23).
[10] Ibid.
[11] Jeff Cox, CNBC.com, “Treasury to borrow $776 billion in the final three months of the year” (October 30, 2023, accessed 11/9/23).
[12] Elisabeth Buchwald, CNN, “Treasury set to borrow $776 billion next quarter, the most ever borrowed in the fourth quarter” (October 30, 2023, accessed 11/9/23).
[13] Ibid.
[14] Ibid.
[15] Mary McDougall, Financial Times, “Oversupply of US debt leaves few takers for Treasuries” (November 6, 2023, accessed 11/9/23).
[16] Ibid.
[17] Home.Treasury.gov, “Joint Statement of Janet L. Yellen, Secretary of the Treasury, and Shalanda D. Young, Director of the Office of Management and Budget, on Budget Results for Fiscal Year 2023” (October 20, 2023, accessed 11/9/23).
[18] Kimberly Amadeo, The Balance, “US Budget Deficit by Year Compared to GDP, the National Debt, and Events” (April 5, 2022, accessed 11/9/23).
[19] CRFB.org, “An Overview of the President’s FY 2024 Budget” (March 9, 2023, accessed 11/9/23).
[20] CBO.gov, “The Budget and Economic Outlook: 2023 to 2033” (February 2023, accessed 11/9/23).
[21] Liz Capo McCormick, Bloomberg.com, “US Ramps Up Debt Issuance, Adding Fuel to Selloff in Treasuries” (August 2, 2023, accessed 11/9/23).
[22] McDougall, “Oversupply of US debt.”
[23] Jamie McGeever, Reuters.com, “China, Japan share of US bond market shrinks to record low” (August 24, 2023, accessed 11/9/23).
[24] Matt Phillips, Axios, “America’s biggest bond buyers aren’t buying bonds” (October 11, 2023, accessed 11/9/23).
[25] Rick Newman, Yahoo Finance, “The national debt is finally a real-world problem” (October 30, 2023, accessed 11/9/23).
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