As discussed here on too many occasions to count over the past week or two, Treasury could relieve some of the accumulated stress at the long-end of the US curve by adjusting issuance to include (even) more bills in the funding mix, reducing anxiety around coupon supply.
There are sponsorship concerns for US notes and bonds given an epochal shift in the buyer base, which is skewing more and more towards price-sensitive investors. In short: Price discovery is back, and the clearing price is pretty plainly lower (i.e., higher yields).
By contrast, demand for bills is voracious. There’s still $1 trillion+ parked in RRP on any given day that can absorb bill issuance and money market fund AUM sits near a record above $5.6 trillion.
Recall that although bills as a percentage of outstanding debt are now near the upper-end of the TBAC-recommended range, dealers are apparently fine with bill share “temporarily” (as the last refunding minutes put it) exceeding 20%.
The “will they or won’t they” drama around the bill/coupon mix will be decided in relatively short order, but it’s important to understand how we got to this point — that is, what happened over the past three months to make Treasury’s quarterly refunding announcement the most important market event in a week that includes an FOMC meeting and an NFP report.
With that in mind, who better to tell the story than reader favorite and cult-following phenomenon Charlie McElligott? On Monday, Charlie penned the following brief recap, which is well worth the two minutes it’ll take you to peruse it.
Clearly the prior Treasury financing estimates / refunding announcement crystalized “structural” headwinds for USTs in late July / early August, where a sharp blast of increased duration supply from untethered government fiscal deficit spending in conjunction with a litany of already negative flow- and economic- headwinds for Treasurys, contributed to the rates selloff / term-premium “reset” escalation over the course of late summer and into fall, which has recently then seen second-order impacts as a substantial negative impact for equities valuations via multiple compression, mounting headwinds for corporate earnings growth and ultimately risking a downturn in the credit cycle.
However, and in light of the violence of the financial conditions tightening shock which has come with said UST selloff and particularly, the long-end / duration destruction since mid-summer, we have witnessed Treasury’s Yellen, multiple Fed Governors and most recently, National Economics Council’s Brainard all acknowledge the risks posed from such an FCI tightening shock as it relates to the potential for negative cycle impacts and the risks of something “breaking.”
Accordingly, there’s been increasing speculation in the market that the Treasury could consider an adjustment or “twist” to the composition of the government debt issuance to ease recent stress catalysts.
As stated, and in light of absolutely enormous demand for bills that we currently see via money funds– paired with said concerns about the magnitude of the move in long-end yields / duration (which mean sharply increased borrowing costs for corporates and households) — the Treasury could adjust their refunding supply outlook to feature more bills and less coupon versus prior market expectations.
Read more: A Quick Guide To The All-Important Treasury Refunding
