• Treasury Starts Offering Bonds

    Treasury Starts Offering Bonds to Cover Coronavirus Debt of $3 Trillion

    Pandemic Costs Are Mounting as GDP Takes a Hit From Reduced Spending in Several Categories

    The Treasury Department expects to borrow nearly $3 trillion to cover costs stemming from the coronavirus pandemic. (NCinDC/Flickr)
    The Treasury Department expects to borrow nearly $3 trillion to cover costs stemming from the coronavirus pandemic. (NCinDC/Flickr)

    The Treasury Department is planning to offer $96 billion of securities next week as part of a three-month plan to help cover the costs of coronavirus relief efforts.

    The offering will refund about $57 billion of privately held Treasury notes and bonds maturing next week as well as raise new cash of about $39 billion. It will include $22 billion of notes with a 30-year maturity date. Treasury said it expects to begin to shift more of its debt financing to long term as a prudent means of managing its repayment schedule.

    Treasury is planning future offerings through July. Based on current fiscal forecasts, the department said it intends to increase the offering amounts in future deals.

    The offering comes after Treasury earlier in the week announced it expects to borrow nearly $3 trillion through the sale of privately held notes. The estimate is $3.06 trillion higher than what the department planned to borrow in February before the pandemic and when it expected to pay down some of its debt.

    Borrowing needs have increased substantially as a result of the federal government’s response to the COVID-19 outbreak. Since the end of March, the Treasury has raised an unprecedented $1.46 trillion. The increase is primarily driven by the impact of the COVID-19 outbreak, including expenditures from the Coronavirus Aid, Relief, and Economic Security Act, which provided $2.3 trillion in financial assistance to individuals and businesses, as well as changes to tax receipts including the deferral of individual and business taxes.

    “At the beginning of 2020, the U.S. economy was in the midst of the longest recovery in American history,” Assistant Treasury Secretary Michael Faulkender said in a statement discussing economic conditions and the need for borrowing. “Yet towards the latter part of the first quarter, the U.S. economy experienced an exogenous shock from the 2019 novel coronavirus (COVID-19) pandemic and the extraordinary measures taken to respond to it.”

    Measures that included social distancing and mandated business closures triggered a sudden, sharp decline in U.S. economic activity. Real gross domestic product declined by a 4.8% annual rate in the first quarter, according to Treasury’s advance estimate of economic damage.

    Up until the outbreak, GDP expanded for a record 128 months and had posted three consecutive quarters of growth in the range of 2% to 2.1%.

    Private domestic purchases — the sum of personal consumption, business fixed investment and residential investment — fell 6.6% in the first quarter, according to Treasury data.

    Purchases of durable goods, a category that includes motor vehicles, declined 16.1% in the first quarter.

    Expenditures on services fell 10.2%, reflecting significantly reduced demand for travel and lodging, cinemas, theaters, concerts, bars and restaurants as well as the postponement of noncritical health procedures until after the pandemic.

    Despite double-digit declines in purchases of both services and durable goods, consumption of nondurable goods grew by 6.9% in the first quarter, notably from purchases of food and beverages for off-premises consumption.

    In the first quarter, business investment was down 8.6% at an annual rate, after declining 2.4% in the fourth quarter.

    Equipment investment plunged 15.2%, partly reflecting less investment in transportation equipment as Boeing halted production of the 737 Max in January.

    Spending on structures was down 9.7%, reflecting a pullback in manufacturing plants and commercial and healthcare buildings.

    Meanwhile, growth of expenditures on intellectual property products, an important ingredient for innovation and future economic growth, increased 0.4%.

    Residential investment surged 21% in the first quarter. However, the economic effects of the COVID-19 pandemic began to weigh heavily on the housing sector in March. Existing home sales, which account for 90% of all home sales, declined 8.5%.

    “Although available data suggest that economic growth will slow further in the second quarter of 2020, we are convinced that the downturn will be temporary, given that its cause was not the result of any underlying imbalances in the economy,” Faulkender said.