There’s no shortage of key events for markets and traders this week, but the most important may be the Treasury’s borrowing estimate and the refunding details on Monday and Wednesday, respectively.

This is ad nauseam, but it really can’t be emphasized enough: The refunding announcement was the trigger for the November/December “everything rally.”

The proximate cause of market angst beginning in August was a sharp increase in the term premium, reflecting the same (over)supply concerns and D.C. gridlock that prompted the Fitch downgrade. That term premium repricing precipitated a rather vexing bear steepener which weighed heavily on equities through October.

Janet Yellen took note and provided some relief in early November with smaller-than-expected coupon increases. The rest, as they say, is history. The figure above speaks for itself. On October 20, the term premium was 48bps. On December 27, it was negative 46bps. That’s a ~100bps swing. Financial conditions eased accordingly.

“[The] Treasury QRA was the catalyst for the epic Wall Street rally,” BofA’s Michael Hartnett wrote, in his latest, before suggesting that because consensus for the upcoming QRA is “very large,” it’d take a material overshoot to “dent the risk rally.”

The implication is that an undershoot and/or another lean into bills versus coupons has the potential to drive a further rally in risk assets to the extent lower aggregate borrowing and particularly “less” (i.e., smaller increases versus market expectations) longer-end issuance would be bullish for rates and help allay supply concerns.

Monday’s financing number is pretty binary. “Big number bad, small number good,” as Nomura’s Charlie McElligott put it. As for the details on Wednesday, “the greatest uncertainty among market participants is whether Yellen chooses to continue boosting 30-year auction sizes or leans more heavily on the front-end to fund the deficit,” BMO’s US rates team said. “The relatively smaller increases to 30-year auction sizes at the November refunding was certainly an acknowledgement to the rise in term premium which made it less attractive to borrow further out the curve.”

Although the term premium panic is over, and while bills as a share of debt outstanding are above the recommended range, I doubt Treasury wants to get back into a situation where every supply event is a potential land mine for markets. It’s not great when auction reception makes its way above the digital fold across mainstream financial media outlets.

If Yellen decides not to lean too hard into coupon supply and/or suggests we’ve seen the last increases for a while, the market reaction would presumably be favorable. Note that the funding mix update will come just hours before Jerome Powell will likely summarize preliminary discussions at the Fed around the forthcoming QT taper.

Going forward (i.e., post-this refunding), “the key thing to note is that the impact of QT on USTs depends on the Treasury itself — it has to decide whether to reduce issuance in bills or coupons,” Morgan Stanley analysts led by Guneet Dhingra wrote. “We think the Treasury will lower bill sizes offered to the market, because the Treasury would not want to lower coupon sizes right after they increased them for three quarters (from August refunding up to the upcoming refunding),” they added.

More broadly, it’s important for market participants to understand the interplay between the Fed tapering balance sheet runoff and Treasury funding the deficit. This is basic stuff, but it helps to put some numbers to it, even if they’re just guesses.

“If the Fed tapers the pace of QT in Treasurys from $60 billion to $30 billion, SOMA rollovers from the Fed will be $30 billion larger, and this will improve the funding position of the Treasury by $30 billion per month,” Morgan Stanley wrote, in the same cited note. “In our estimate, this net change will improve the funding position of the Treasury by $110 billion in 2024, versus the prior base case where the current pace of runoff was expected to continue until September 2024 before tapering began.” That gives you a sense of the sensitivity, if you will.

Writing late last week, Bloomberg’s Simon White offered a somewhat caustic take. “If proof were needed that the lines between fiscal and monetary policy are becoming ever more blurred, and that total central-bank independence is — de facto — a thing of the past, then the market’s heightened attention to Treasury refunding announcements is it,” he said, in a blog post on the terminal.