There were some questions earlier this week about what I dubbed a “crash-up blueprint 2.0.”

If you missed that article, I encourage you to read it, but here’s the gist: In the event Treasury again announced less in the way of coupon supply than the market expects at the next refunding (i.e., a tilt towards bill issuance versus more bonds, similar to the November refunding), it could knock-on into risk assets in at least two ways.

I should note, quickly, that this is actually a hypothetical posed by Nomura’s Charlie McElligott, who I cited multiple times in the linked article above. Charlie is a mainstay in my coverage and there’s a reason why: He’s very good at what he does, as evidenced most recently by the fact that he predicted the November/December “everything rally” and even the spark for it, which is to say that in October, at the local equity lows/bond yield highs, he suggested that an “issuance twist” could kick off a rally. That’s exactly what happened.

In essence, the “2.0” hypothetical (and for now that’s all it is — a hypothetical) just says the same thing might happen at the next refunding. Treasury could announce less in the way of coupon supply than the market expects and again tilt issuance towards bills, which would be readily absorbed by a wall of money market fund AUM.

This time, though, such a tilt could accelerate the wind down of Fed QT. Why? Well, because the Fed’s concerned about reserve scarcity once RRP balances drain entirely. And what’s RRP drain? Primarily MMFs rotating out the Fed’s parking garage and into bills.

On January 6, Lorie Logan telegraphed that whatever easier financial conditions (on the back of higher stock prices and lower bond yields) mean for the timing of the first rate cut, the time to discuss slowing balance sheet runoff is now, because the RRP facility is running down fast and once it’s drained, QT will begin to impact reserves.

So, if Treasury were to again tilt issuance more towards bills versus coupons compared to market expectations, that could amount to forcing the Fed to accelerate the timeline on QT wind down which, of course, would be bullish for risk assets.

Apparently, Charlie got a few questions about his own hypothetical. He said as much on Wednesday. “LOTS of interest in that one from yesterday,” he wrote, of Tuesday’s dispatch.

Whether or not this pans out, this is the kind of commentary that’s insightful, forward-looking and, crucially for me (and for you too, probably), fun. That, as opposed to what I’ll indelicately call the humdrum research-side material I’m inundated with each day and obliged to wade through.

Without further ado, find the (lightly edited) short version of this “crash-up blueprint 2.0” hypothetical as summarized by McElligott on Wednesday:

LOTS of interest in that one from yesterday, where it seems clear that many macro PMs hadn’t considered the right-tail optionality where the Fed has effectively outsourced the decision-making on the future path of their QT / balance sheet unwind to a politically-motivated (dovish) Yellen Treasury, which on behalf of the Biden administration, is looking to “run the economy / markets HOT” into this year’s election, as the one lever they have to pull versus awful voter polling across nearly all other focus issues.

And HERE is the point where this ties back into the “QT outsourcing” decision from Fed to Treasury: Because yet another QRA announcement of “more bills / not-as-much-coupon-as currently-anticipated” surprise means that money market funds will again stand ready to chomp that supply, which then knocks into an even more accelerated drain out of RRP, and as Logan outlined this weekend, the ever nearing RRP zeroing is the Fed’s reaction function for their “QT tapering” / “outright cessation of QT” determination, in order to avoid systemic liquidity issues, as we approach the lowest comfortable level of reserves.

If this were to be the case, instead of a resumption of bear steepening = equities pullback, you’d likely get a re-accelerated “buy the dip,” bull flattening = equities rally, as a full-tilt dovish right-tail scenario for stocks to blow to new all-time highs (why not 5200?!), as “end of QT” is interpreted as “de facto QE” from a “change-of-change” perspective.