Washington’s borrowing spree is about to hit historic levels. After the latest debt ceiling standoff left its cash reserves depleted, the US Treasury is preparing for one of its largest-ever borrowing sprees. It’s a stark reminder of how costly political standoffs can be, as rising government expenses run headfirst into weaker revenues and new spending pressures.
As per reports, on Monday, August 25, the Treasury revealed plans to borrow a staggering USD 1.007 trillion in the third quarter (Q3), a sharp increase as it looks to rebuild its drained reserves.
That total is USD 453 billion higher than April’s forecast, mainly driven by a slimmer-than-expected cash balance at the start of the quarter and weaker projected inflows. By the end of September, the Treasury aims to have USD 850 billion in cash on hand, according to its statement. In short, the US is borrowing much more money than expected to rebuild its savings after the debt ceiling fight and new spending laws, raising concerns about how it will fund its rising deficit in the future.
What is a debt ceiling? The US debt ceiling is a legal cap on how much the government can borrow to pay for obligations it has already approved, such as Social Security, military salaries, and interest on debt. When the ceiling is reached, the Treasury can temporarily use “extraordinary measures” accounting manoeuvres to keep paying bills, but once those run out, the US risks defaulting for the first time in history.
Why the surge in borrowing?
The surge in borrowing comes as Washington scrambles to rebuild its financial buffer in the wake of President Donald Trump’s Independence Day signing of the sweeping tax-and-spending package. With the legislation’s passage, the nation’s debt ceiling ballooned by USD 5 trillion, pushing the limit to USD 41.1 trillion. Treasury’s cash reserves sank to just USD 313 billion on July 3, according to data from Wrightson ICAP.
The Treasury signalled that it expects to borrow USD 590 billion in the fourth quarter (Q4), while targeting a year-end cash balance of USD 850 billion. By contrast, in the second quarter, it borrowed just USD 65 billion in privately held marketable debt, closing June with USD 457 billion in cash. Back in April, the department had pencilled in a much larger USD 514 billion borrowing estimate and assumed it would finish the quarter with USD 850 billion on hand.
Further details on the Treasury’s latest borrowing outlook will be released on Wednesday alongside its quarterly financing plans. Market watchers largely anticipate that auction sizes for notes and bonds will remain unchanged for now. The big question investors are asking is -how long can the Treasury avoid boosting auction sizes to cover America’s swelling budget deficit?
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