For the first seven months of the fiscal year, revenues are up by $220 billion, or 16%, versus the same period in FY2012. Outlays are only slightly lower than last year, but the sequester cuts are just getting underway.
The CBO will update their figures this week, but the deficit may come in closer to $700 billion this year (4.4% of GDP), and will be heavily revised down in 2014.
Some analysts have raised the prospect that a Treasury shortage could emerge, given that the Fed and foreign central banks are absorbing a large share of the supply of new bonds. We think this risk is overblown.
True, the Fed alone will soak up virtually all of the net new issuance of Treasury bonds this year. The Treasury has outlined its issuance calendar to the end of the third quarter, and will likely delay any changes to the pace of coupon issuance until 2014, irrespective of the budget deficit. Factoring in demand from foreign central banks, the stock of Treasurys available for private investors will fall from about 42% of the outstanding stock in 2012, to 33% in 2014.
However, the stock of privately-held debt in 2014 will still be $2604 billion more than in 2007, so one cannot really expect a shortage to develop in the next couple of years.
That said, any Treasury supply reduction will come at a time when there remains an intense global demand for safety and income.