Good news. I guess.
Treasury slashed its quarterly borrowing estimate on Monday, which I suppose counts as an auspicious development ahead of the closely-watched refunding announcement later this week.
Instead of $852 billion, the US will borrow just $776 billion in privately-held net marketable debt for the October to December quarter. Treasury still assumes an end-of December cash balance of $750 billion. The lower estimate was down to higher forecasted receipts, Treasury said, apparently due to delayed payments from California.
The headline number was below some Wall Street forecasts, but not all. Goldman, for example, anticipated $739 billion.
Treasury’s estimate for the January to March 2024 quarter is $816 billion. That assumes the same $750 billion cash balance for end-March.
The long-end rallied late Monday on the headlines, a whipsaw of sorts after weakness seen earlier in the session, when Nikkei said the Bank of Japan may indeed raise the yield-curve control cap again, or at least allow some scope for 10-year JGB yields to move above 1%.
As noted here Sunday, a BoJ tweak would be a big deal. It’d also be the second in three months. The context is, of course, rising US yields.
“The BoJ is also likely to more flexibly conduct its JGB purchase operations,” Nikkei said, citing sources. “This, along with a more flexible cap on 10-year yields, is aimed at deterring speculators from targeting the upper limit and sparing the BoJ the need to buy droves of JGBs to keep rates under 1%.”
If the BoJ does indeed raise the roof on Tuesday (that’s a bad joke), it should be a relief for the yen. I’ll recycle some language from my central bank preview. Whenever 10-year JGB yields are at or near the ceiling, the risks to the yen are twofold: The BoJ prints money to defend the yield cap (tantamount to easing), and because upward pressure on JGB yields tends to coincide with rising Treasury yields, rate differentials tend to move against the yen (because JGB yields can only rise so far).
That’s what the BoJ is trying to manage. Relatedly, they’re trying to address the absurdity inherent in selling dollars to defend the yen (i.e., FX invention) one day, then printing yen to defend the yield cap the next.
According to Nikkei, “rates have risen faster than the central bank had expected in July” when Kazuo Ueda unveiled what he called “flexible” YCC.
In any event, a deliberately simplistic summary says the lower borrowing estimate from Janet Yellen was marginally bullish for Treasurys in the lead-up to Wednesday’s refunding announcement, while the BoJ rumors were bearish.
The Nikkei story suggested the BoJ is amenable to a gradual, controlled exit from YCC, and although parsing the read-through of that for Treasurys is a lot more complicated than you’d be inclined to believe, any movement from the BoJ towards normalization is newsworthy and can’t be ignored, particularly not now, amid the most dramatic US bond selloff in six decades.
Read more on the refunding:
