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Analysts have warned that the US will need to rely on short-term debt to fund a significant increase in its budget deficit, which will have implications for money markets and the fight against inflation, as reported by The Financial Times.
The Congressional Budget Office recently stated that the US deficit for this fiscal year is expected to reach $1.9tn, up from its previous prediction of $1.5tn, citing aid packages for Ukraine and Israel as contributing factors.
The growing deficit has raised concerns among fiscal hawks, who fear that the lack of financial discipline in the US will lead to higher borrowing costs.
Both President Joe Biden and his Republican opponent Donald Trump have been criticized for lacking substantial plans to address the country's financial situation. Adding that the shift towards short-term financing could disrupt money markets and complicate the Federal Reserve's efforts to combat inflation.
One factor contributing to the deficit increase is the expected forgiveness of student loans, which is not anticipated to immediately impact cash flows.
However, JPMorgan's Jay Barry predicted that the expanded deficit would necessitate the US to issue an additional $150bn of debt in the three months leading up to the end of the fiscal year in September.
Barry also anticipated that a significant portion of these funds would be raised through Treasury bills, short-term debt instruments with maturities ranging from one day to a year.
This move would raise the total outstanding stock of Treasury bills from $5.7tn at the end of 2023 to a record high of $6.2tn by the end of this year.
The potential increase in the share of Treasury bills as a portion of total debt raises questions about who will purchase them, according to Torsten Slok, chief economist at Apollo.
This could potentially strain funding markets. The size of the Treasury market has quintupled since.
