The 10-year Treasury yield's breakout past 4% on Aug. 1 came after the Treasury Department boosted its third-quarter borrowing needs by $274 billion to just over $1 trillion. And the hits kept coming — a sovereign downgrade by Fitch Ratings, a more hawkish Federal Reserve and sizzling GDP growth.
It all added up to a dizzying surge for the 10-year Treasury yield that peaked — at least for the moment — at 4.99% on Oct. 19.
10-Year Treasury Yield Reacts To New Borrowing Estimates
The Treasury Department said Monday afternoon that it expects to borrow $776 billion in the fourth quarter and $816 billion in the first quarter of 2024.
The 10-year Treasury yield rose 3 basis points to 4.88% ahead of the announcement, then dipped slightly to 4.86%.
Keep in mind that the 10-year Treasury yield is an important factor in stock market valuations, because higher rates reduce the present value of future earnings streams. Plus, the 10-year Treasury yield helps determine the interest rate on auto loans and the 30-year fixed-rate mortgage, whose recent surge has sent applications for mortgages to buy a new home plunging to its lowest level since 1995.
October Tax Revenue
So here's the relatively good news: The latest daily Treasury statement shows tax payments of $358 billion so far in October vs. $246 billion over the same period a year ago. That includes $50.6 billion in corporate taxes vs. $13.8 billion a year earlier. Meanwhile, tax refunds are running about $8 billion below year-ago levels.
After surprisingly muted federal tax collections in 2023, we've seen a sudden surge. That's not altogether surprising, given that Treasury delayed tax filing deadlines in places hit by natural disasters, including most of California. The deadline for most of Florida has been extended to Feb. 15.
One takeaway is that the fiscal 2023 budget deficit, which would have been around $2 trillion if not the Supreme Court striking down student loan forgiveness, may not be quite as bad as it seems.
Why Is Treasury Borrowing So Much?
Yet even if the U.S. were running a $2-trillion deficit, it's still pretty shocking that the Treasury had to float an extra $1 trillion in debt in a single quarter. But two additional factors help explain the heavy borrowing needs.
One is that the Fed is unloading up to $60 billion in Treasuries per month as they reach their maturity date in a reversal of its emergency asset-buying program launched early in the pandemic. So that explains an extra $180 billion in quarterly borrowing.
Meanwhile, the Treasury had spent down its cash balance to keep from breaching the debt limit before Congress agreed to lift that limit in early June. So about $350 billion of the intended borrowing in Q3 was to restore its cash balance to more normal levels.
Treasury Cash Balance
That brings us to some more good news: Treasury has said it wants to end Q4 with a cash balance of $750 billion. But as of Oct. 26, that balance was $835 billion, which should lower borrowing needs.
Wall Street has factored in the increase in tax revenue to projections for Q4 borrowing, at least to some extent. Deutsche Bank economists expect $749 billion in borrowing in Q4, which is less than Treasury's prior estimate of $852 billion.
Deutsche Bank anticipates $822 billion in borrowing in Q1.
