Yields Tumble, Futures Soar After Treasury Unexpectedly Slashes Borrowing Estimates

Tyler Durden's Photo
by Tyler Durden
Monday, Jan 29, 2024 - 08:30 PM

After two very "eventful" quarterly refunding announcements by the Treasury, the first of which sent yields soaring to decade highs, when the Treasury forecast higher than expected coupon issuance in July, followed by a mirror image in October, when the Treasury surprised with slightly lower coupon issuance (offset by a surge in Bill issuance)...

... moments ago the Treasury published the first part of this week's closely watched Quarterly Refunding Announcement, when at 3pm ET it released the estimates borrowing estimates (and overall sources and uses of Treasury debt and cash) for calendar Q1 and Q2, both of which came in well below estimates.

As a reminder, in our preview last night we showed that Deutsche Bank - which was indicative of the overall street - was expecting $797BN in Q1 borrowing, followed by $472BN in total Q2 borrowings.

In the end, both numbers ended up being very high, because according to the Treasury, it now expects to borrow "only" $760 billion in debt, which is $55 billion lower than what it expected in October 2023, and is about $30BN below wall street estimates. The difference the Treasury explained is "largely due to projections of higher net fiscal flows and a higher beginning of quarter cash balance." In other words, Treasury expects higher taxes to more than make up the $55BN difference  from the previous estimate. Treasury officials speaking with reporters declined to offer a breakdown on the improvement in fiscal flows relative to previous expectations, Bloomberg reported..

Then, looking further out, during the April – June 2024 quarter, the Treasury now expects to borrow only $202 billion in debt. While there was no previous Treasury forecast for this period, Wall Street expected a number somewhere in the $500BN vicinity, so clearly this is far lower than preciously expected. To be sure, dealers have warned that there’s much more uncertainty regarding financing estimates for the second quarter. Along with the Fed’s plans for its quantitative tightening program, another unknown is prospects for Congress enacting a $78 billion tax bill — which would dramatically worsen the deficit. Of course, the Treasury forecasts do not account for that.

“The outlook for the Wyden-Smith tax bill is a major swing factor,” and at present we “flipped a coin and decided to assume that the legislation would not be approved,” Lou Crandall at Wrightson ICAP LLC said in a note before the Treasury’s Monday release. He penciled in $410 billion for net borrowing for the three months through June, ending with a $750 billion cash balance.

In other words, the Q1 numbers but especially the Q2 are... well... completely made up for lack of a better word.

Finally, turning to the just past calendar Q4, the Treasury borrowed $776 billion in debt - precisely on top of what it had expected as of 3 months ago - and ended the quarter with a cash balance of $769 billion, some $19 billion higher than the benchmark estimate of $750 billion as of Q3: "the ending cash balance was $19 billion higher due primarily to other sources of financing including lower than projected discount on marketable borrowing."

Here is the data in table format:

Source: Treasury

The reason why the data was shocking to Wall Street is because, as we previewed yesterday, most of the Wall Street sellside had anticipated a slight boost to the borrowing estimate, in part due to the fiscal deficit widening in recent months and in part because the TBAC itself said three months ago to expect an increase in issuance this quarter. Indeed, Deutsche Bank was positively tame: consider that Jay Barry, co-head of US rates strategy at JPMorgan, predicted an $855 billion net borrowing figure for this quarter, assuming a $750 billion cash balance at the end of the period.

While the Treasury is still facing rising costs to refinance its existing debt in wake of the Federal Reserve lifting its policy rate from near zero in 2022 to over 5%, yields tumbled over the past quarter as traders bet on a pivot to easing in 2024. A potential tapering, or end, of the Fed’s bond-portfolio runoff has also boosted sentiment — a shift that would also ease borrowing pressure on the Treasury.

The backdrop has most dealers expecting the Treasury on Wednesday to announce a final round of increases to note and bond sales, at its so-called quarterly refunding.

Even more importantly, what the Treasury's latest forecast means is that the relentless deficit boost - which was behind the economic surge (due to reduced tax payments and much higher government stimulus spending) known as Bidenomics - is coming to an end.

We disagree, and are confident that just like all the other lies in this administration, the Treasury forecast is just Yellen working on behalf of the Administration to prevent a yield spike, because if the Treasury had admitted what is really coming yields would be soaring right now. Instead, in three months time, when we get the next quarterly "actuals", we will find that the Treasury had been off by a few hundred billion in its estimates, and how can that not be when one take a quick look at what is coming.

The numbers also mean that the Reverse Repo facility will be fully drained by Q2, and we expect that on Wednesday we will learn that the bulk of the reduction in Q1 and Q2 estimates will be due to sharply lower Bill issuance for one simple reason: there is just no more Reverse Repo cash to buy it all.

In any case, in kneejerk reaction to the Treasury new, the market was more than happy to send yields plunging...

... and stocks surging to new all time highs because we are clearly now in a period when Biden, having given up on the "But i lowered your inflation" narrative is instead gunning for the lowest common denominator: pushing stock to a new all time high by November in hopes that at least will buy him the needed votes to defeat trump.