My Outlook For The Treasury Quarterly Refunding Announcement Today
Way too much ink has already been spilled about the QRA this week. The fact that such a focus has been played on it suggests that the Overton Window on US government debt growth sustainability is becoming more top of mind for investors and is increasingly becoming a concern. Something needs to be done about the continuation of deficits for as far as the eye can see. DC is dysfunctional and the Fed has enabled it. Something needs to change eventually but that day is probably not going to be today.
I am already on the record with my thoughts that the only reason I think for Janet to consider lowering the issuance of duration securities this week is because she is entirely political and just wants to juice markets ahead of the election, without regard for how another loosening of financial conditions will lead to higher inflation expectations and actual inflation.
Basically every other sign would suggest that she should keep duration supply issuance constant in the 3Q as she did in the 2Q and continue to balance out the bills vs bonds composition of the government’s balance sheet back to its historical 15-20% range in non-exogenous times, utilizing still low term premiums and inverted yield curve as an opportunity to benefit the US taxpayer by locking in longer-term debt at attractive rates.
We get the first phase of the QRA release today at 3pm when Treasury will give an update on 2Q total borrowing amounts (updated for tax receipts that have come in), an expectation of 3Q borrowing amounts and the intended end of 2Q and 3Q TGA amounts. As for the 2Q borrowing amounts, given what seems to be marginally better than expected tax receipts, this figure may come in a little lower than expected but isn’t really a big deal as any drop off in borrowings will just be dealt with through lower bills issuance.
As for the 3Q borrowing amounts, we know that the deficits in FY24 are still running around $1.6trn and have come in at $1.1trn for the first 6 months of the year so there are still a fair bit of borrowing needs to go. Treasury also needs to issue paper to replace the Fed’s paper which rolls off via QT and as of now, that is still running at $60b/month ($180bn/quarter). So estimates of the 3Q borrowing needs I have seen seem like they are in the $500-650bn range. If we get a figure for 3Q borrowings in that range, this is probably not going to be a market moving event. If we get something on either side of the range, we may see markets acting into the close today with low borrowing amounts being seen as bullish for risk, high borrowing amounts risk off.
We will also get the update on end of 2Q TGA which should remain at $750bn and end of 3Q which should also remain at $750bn. If we get something lower than that, that would suggest that perhaps Yellen is choosing the “pumping” route and will be looking to issue less securities into the election, something that is likely also to be construed as risk on. Most likely this afternoon will not be risk moving event and the more important data release will be Wednesday morning at 8:30 which comes ahead of the Fed’s meeting in the afternoon.
Markets seem to be setting up for the Yellen “pump” again, enacting the Treasury put now that bonds have sold off this quarter in a hope that she will run the markets and the economy hot into the election to get the administration re-elected, despite what will likely trigger animal spirits, inflation expectations and actual inflation, making it more difficult to return inflation to 2%. Markets are saying she is entirely political because she has recently acted in that way. We will see what happens. Rest up, it’s gonna be a busy week.
