I’ve mentioned Lorie Logan three times in three days. Four times in four days if you count an exceedingly rare social media post.

“QT end messaging kicks off,” I said on January 6, when headlines from Logan’s remarks at an event in San Antonio crossed on the terminal.

Although Logan repeated the message from the December FOMC minutes regarding the risk that the recent easing in financial conditions could work at cross-purposes with the Fed’s efforts to run the proverbial “last mile” of the inflation fight, the more important takeaway from her address was that the Fed’s cognizant of the extent to which balance sheet runoff will begin to impact reserves as RRP balances fall away in 2024.

Facility usage is down ~$1.5 trillion since the debt ceiling deal, as RRP transformation absorbed T-bill issuance. That mitigated reserve drain and facilitated a painless QT.

“[The Fed’s] securities holdings have declined by $1.3 trillion [but] bank reserve balances have actually risen by $350 billion because reduced balances in the RRP facility have more than offset the decline,” Logan explained, for anyone who still doesn’t grasp this dynamic. “Given the rapid decline of RRP, I think it’s appropriate to consider the parameters that will guide a decision to slow the runoff of our assets.”

In other words: The Fed’s ready to discuss a slower pace of runoff and, ultimately, an end date for QT. That might’ve played a role in buoyant risk assets earlier this week. “Logan’s signaling… acted like catnip to the highest-beta pockets of risk assets, and spiked the punchbowl,” Nomura’s Charlie McElligott said Tuesday, of the prior session’s price action.

Looking ahead, it’s easy enough to suggest that the end-2023 squeeze left equities vulnerable and bonds overbought, particularly in the context of the next refunding announcement. Regular readers are tired of hearing this by now, but it was the November refunding which got the ball rolling on the “everything rally” that ensued into year-end.

Long story short, coupon increases were smaller than expected, and that ended the sharp increase in the term premium which was behind the bear steepener that undercut equities and risk sentiment more generally in August, September and October.

In the event the next QRA rekindles concerns about coupon supply, it’s possible we could see a reverse of the dynamics that played out in November and December — that is, yields could rise on fresh oversupply worries, and with equities having re-rated into the bond rally, valuations could be at risk from higher rates.

However, if that doesn’t happen, and particularly if Janet Yellen doubles down on November’s “success” story, we could get a right-tail crash-up redux, especially given the read-through of another hypothetical issuance lean into bills for whatever’s left in the RRP facility by the end of this month (i.e., in the context of Logan’s remarks).

Below, find McElligott’s description of right-tail sequencing, and please note: This is hypothetical. It’s a thought experiment and, for now anyway, it’s out-of-consensus, albeit not at all far-fetched.

Via McElligott:

This is how we get the right tail…

What if that “consensus path” for the QRA yet again sees ‘political’ interventionism / ‘activism’ from Treasury’s Yellen, and she not only again leans on more bills with less coupon increases than currently anticipated, but then too provides guidance to markets that this is the final coupon increase moving forward?

This hypothetical / anti-consensus ‘more bills, less-coupon-than-expected 2.0’ scenario would not only ease financial conditions further, with a likely bull flattening and lower yields to rally risk assets — especially with the ‘forward guidance’ component of Treasury stating that this would be the final coupon increase — but then too would likely act to ‘self-fulfill’ a dovish second-order impact as [a] continuation of the bills issuance spigot [would] be digested by money market funds. [That] would see an even [faster] RRP drain, allow[ing] for the just-outlined Logan ‘early-end to QT’ scenario to play out, with cessation of runoff announced as soon as spring.

BOOM, you’re cooking with grease.

So, that’s the November/December redux “risk,” with the scare quotes to denote that “risk” here means the good kind of risk, assuming you’re long — melt-up risk.

In the wake of Logan’s remarks, everybody who’s anybody is now sketching the contours of a QT taper and mapping out the implications for issuance. When you think about bills versus coupons, you do want to take account of the fact that bills’ share is already quite high.

Last year, everyone seemed fairly comfortable with that, in no small part due to money market fund demand and the tsunami of inflows which drove MMF AUM up to almost $6 trillion.

The chart above was attached to a Tuesday note from the desk of BMO’s Ben Jeffery, whose quick remarks I’ll excerpt below for context (and without further comment).

Via Jeffery

What happens with SOMA also matters for issuance, and while any tweak won’t impact February’s refunding announcement (January 31), it could for May’s if slower QT is announced in March. In any case, more SOMA reinvestment means less Treasury issuance. Initially, given bills are now above Yellen’s comfort band [at] 21.5%, tapering QT will mean more modest bill issuance, with the important caveat of what tax receipts look like. But it also probably means coupon issuance doesn’t need to stay this high forever, and especially after the August refunding announcement kicked off 10-year term premium to its highest level since 2015, maybe the risk of another big bear steepening driven by supply has waned since the minutes and Logan starting talking taper.