U.S. Treasury Now Sees $26 Billion Paydown in Debt This Quarter

(Bloomberg) — The U.S. Treasury now anticipates a paydown in government debt this quarter, a turnaround after previously estimating net borrowing during the period, amid a surge in tax revenue.

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The Treasury’s new projections, released in Washington Monday, show debt managers now expect to pay down $26 billion of debt in the April-through-June period. That compares with $66 billion in new borrowing it anticipated in January, and would mark the first quarterly paydown in six years.

Treasury officials cautioned that the estimate doesn’t incorporate any assumption for the Federal Reserve scaling back its holdings of Treasuries. The department’s borrowing needs would be bigger if the Fed does start its bond-portfolio runoff, they said.

The Treasury currently assumes a cash balance at the end of June of $800 billion. That’s $100 billion more than what it estimated back in February. That stockpile is currently $953 billion.

The Fed is widely expected at the end of their two-day meeting on Wednesday to announce the start of the reduction of its $9 trillion balance sheet, alongside a half-point hike in the policy interest rate. Minutes of the Fed’s March gathering signaled the maximum runoff pace of $95 billion a month — with $60 billion of that in Treasuries.

Surprise Move

The estimate of a paydown in debt will come as a surprise to some on Wall Street — who had anticipated some incorporation by the Treasury of the looming Fed balance-sheet contraction. They had also assumed the Treasury would continue to target an about a $700 billion cash balance.

Jefferies analysts had estimated borrowing needs for the April-to-June quarter at $75 billion. Strategists at JPMorgan Chase & Co. had seen an even bigger jump, projecting a move to $215 billion.

For the three months through September, the Treasury said Monday that it anticipates borrowing $182 billion through net new marketable debt issuance, assuming a cash balance of $650 billion at the end of the period. Again, the projections don’t factor in Fed action.

The Treasury on Wednesday will announce plans for its so-called quarterly refunding of longer-term securities. Most dealers predict U.S. debt managers will scale back its auctions for a third straight quarter, yet by a smaller degree than the prior three-month period.

Read More: U.S. Seen Cutting Quarterly Debt Sale Once More, Ahead of Fed QT