Global Uncertainty Drives Demand For U.S. Treasuries – Fiscal Policy

Global Uncertainty Drives Demand For U.S. Treasuries – Fiscal Policy – March 2019

The prospect of an increasing deficit has led to an increase in debt issuance by the Treasury due to an expected shortfall of tax revenue. The Treasury issues debt in order to fund the ongoing operations of the U.S. government.

Some of the recent tax measures passed by Congress are expected to reduce revenues while increasing spending, which will in turn be funded by issuing new Treasuries.

The debt management process is comprised of both the issuance of new debt and the retirement of preexisting debt. Should the Treasury issue more debt than it is retiring, there is a net increase in the amount of debt outstanding.

Over the past 18 years, the Treasury has issued an average of $505.4 billion of debt each month, while also retiring or simply paying off an average of $454.8 billion every month. This deficit has been a subject of constant political debate.

Rising interest rates may start to be a significant factor on Federal debt payments. As the Treasury issues new debt, it is doing so at a higher cost of capital (higher interest rates) than preexisting debt. Should rates rise too far too fast, then the interest payments, also known as interest expense on government debt, might start to become an unfavorable expense.

A heightened supply of Treasuries follows tax cuts and increased government spending, along with growing entitlement payments and higher service costs for government debt.

The Treasury Department’s total net new issuance in 2018 amounted to $1.34 trillion, more than double the 2017 level of $550 billion. It is estimated that new debt issuance for 2019 will be $1.4 trillion, then range from $1.25 trillion to $1.4 trillion over the next four years.

Despite the increased flood of new government debt supply, demand has surprisingly kept up as an insatiable demand from abroad continues to drive investors to the liquid and transparent market of U.S. government debt.

Sources: U.S. Treasury Department

Disclaimer: The information published herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or an offer to buy securities, investment products or investment advisory services. All information, views, opinions and estimates are subject to change or correction without notice. Nothing contained herein constitutes financial, legal, tax, or other advice. The appropriateness of an investment or strategy will depend on an investor’s circumstances and objectives. Please consult your Advisor about what is best for you.

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