Earlier this week, I took a few minutes to put readers to sleep by revisiting the term premium discussion.

Long story short, it (the term premium) moved back into positive territory recently amid a pretty sharp selloff across the US rates complex, which is trying to price both a prolonged stay at terminal for the Fed (a front-end story) and perpetual “fiscal dominance” (a longer-end story with ramifications for the front-end via the monetary policy read-through of an economy high on budget profligacy).

It’d be nice (read: helpful for equities which recently woke up to 2024’s progressively more onerous rates reality) if the next quarterly refunding served as a palliative for rates, given that the underlying cause of the hawkish re-pricing is unlikely to resolve anytime soon.

With that in mind, consider this: The combination of robust pay gains and buoyant asset prices in 2023 likely drove up tax revenue, which should reduce Treasury’s near-term borrowing needs. That, in turn, could open the door to another backdoor Janet Yellen equity “put.”

“I think it is absolutely possible that due to tax receipts coming in strong, Yellen could again surprise the market with another ‘low’ financing estimate thanks to [the] TGA build… which could help drive a bond short squeeze again and boost risk sentiment, albeit nowhere close to the magnitude of the prior two QRA surprises,” Nomura’s Charlie McElligott said, referencing the April 29 financing estimate.

As for the refunding details, Charlie’s colleague Jon Cohn noted that if the borrowing estimate undershoots, it should mechanically mean lower T-bill supply given that Treasury communicated static coupon sizes after last quarter.

Of course, “low” and “lower” are relative terms in this context, and as Cohn went on to say, Treasury may well lean further into bills going forward, particularly in the context of the Fed’s (rather explicit) suggestion that the Committee could move to shorten the duration of its balance sheet.

The point, to sum up, is just that higher tax receipts might pave the way for a lower financing estimate and with coupon sizes seen unchanged, that’d translate into incrementally lighter bill supply, all with the effect of providing some “near-term respite” for US rates, as McElligott put it. As we saw in November and December, that can act to ease financial conditions to the benefit of equities.

I realize this is a bit dry, but the dynamic outlined above was the catalyst for what eventually became the strongest five-month stock rally in recent memory outside of the rebound from the pandemic crash.