WASHINGTON -- The Treasury Department is expected next week to scale back its estimate of its borrowing needs for this quarter as it prepares for the regular quarterly refunding to be held in August.
Before the last refunding in May, the Treasury gave a preliminary estimate for net marketable borrowing in the range of $110 billion to $115 billion in the third quarter. Now, according to private economists and Office of Management and Budget figures, a more realistic estimate would be in the range of $90 billion to $95 billion -- still a lot of demand for credit, but not as much as the Treasury suggested in the spring.
The lower estimate comes because contributions from U.S. allies for Desert Storm and a sluggish pace of outlays to pay off depositors at failed thrifts are combining to give the Treasury a temporary lift that will restrain government demand in the credit markets, analysts said.
The Treasury is expected to announce next Wednesday the terms of the third-quarter refunding, which is scheduled to take place from Aug. 6 to Aug. 8. Market participants expect the department to unveil plans to sell some $38 billion of three-year notes, 10-year bonds, and 30-year bonds.
While $38 billion is by no means a small amount for dealers to swallow, it would not be much higher than the $37 billion auctioned in May.
Because the bond market has been anticipating a sizable supply, economists do nt believe the refunding will create much turbulence.
Officials of the Office of Management and Budget acknowledged last week that the administration is finding less need to borrow than was estimated in February, when the budget was first presented to Congress.
The midsession review by the budget office estimated the deficit will total $282.2 billion in fiscal 1991, which ends Sept. 30, down from the original estimate of $318.1 billion, but that the fiscal 1992 deficit will soar to $348.3 billion -- $67.4 billion higher than forecast in February.
Some analysts suspect the Treasury's borrowing estimates have become politicized because the figures are based on a pessimistic budget scenario. When the budget deficit turns out to be lower, they say, the Treasury can claim improvement.
"One problem with a politicized budget estimate is that at times it can create politicized borrowing estimates," said analysts at Griggs & Santow, Inc., in a recent market letter.
"Treasury tends to be pessimistic, and about 90% of the time they are too high," said Jeremy Gluck, vice president for Mitsubishi Bank. "I guess the strategy seems to be if you project the worst case and it comes out better, it doesn't look so bad."
F. Ward McCarthy, managing director of Stone & McCarthy Research Associates Inc., in Princeton, N.J., disagreed. "The Treasury is struggling the same way private analysts are because Resolution Trust Corp. activity is such a wild card," he said.
According to the OMB, net federal outlays to make up losses on deposits at thrifts and commercial banks will be $28.0 billion lower in 1991 than in the February budget estimate. The reduction represents fewer closings of institutions than expected as well as the delay by Congress in approving additional clean-up funds, officials said.
Payments by U.S. allies for the war against Iraq gave the budget another temporary boost, although most of those payments have been received. According to the budget office, Desert Storm contributions through July 12 totaled $39 billion, leaving some $9.2 billion expected the rest of the year.
Administration officials acknowledged that as Desert Storm payments recede and federal payments for failed thrifts and commercial banks pick up, the budget deficit will rise once again. The estimate for the fiscal 1992 budget deficit was raised to $348.3 billion, up from February's forecast of $280.0 billion.
The administration has already come in for the usual criticism from Congress that its budget forecast is too optimistic, with unrealistically high estimates for economic growth. The 1992 forecast calls for real growth of 3.6%, which is stronger than many private forecasts and that of Federal Reserve policymakers.
But for now, conditions seem favorable for another refunding without too much turbulence in the bond market. The market has been anticipating a large Treasury supply for some time, said Mr. Gluck. "Yields are already high because of supply. The Treasury can sell these issues without much in the way of yield concessions."
The latest Treasury sales of notes and 52-week bills have gone well, boosted by weak economic indicators from the government. On Wednesday, the Commerce Department reported that orders for durable goods fell 1.6% in June, and earlier it said retail sales for the month were down. In addition, the money supply has been weak and inflation has ebbed. "All of that should provide favorable support for the bond market," said Mr. McCarthy.
