Impact of Treasury Asset Announcements on Market Trends

This is how the Treasury General Account (TGA) will soon impact liquidity. At the July QRA, the US announced its intention to replenish the Treasury General Account (TGA) up to $850 billion by the end of September. That would represent a very rapid increase from today's roughly $400 billion level - such a fast pace of TGA replenishment was only seen a handful of times in the last 10 years. What happens when the Treasury replenishes its TGA? And why does it matter for markets and the economy? Take a look at the T-Account below. When the government wants to rebuild its Treasury General Account, it issues bonds (Step 1) but not for the purpose of ‘’financing’’ money creation – rather simply to rebuild its coffers at the Fed (TGA). As you can see below, a TGA rebuild ends up with a reduction in bank reserves (steps 2 and 3) and no creation of money for the private sector as the money is used to refill the TGA instead (step 4). Effectively, replenishing the TGA is an operation akin to draining liquidity (e.g. bank reserves) from the system. Today, bank reserves are sitting at $3.3 trillion and given the ongoing QT and large TGA rebuild they could drop below $3 trillion soon. That would be the equivalent of less than 10% of nominal GDP. The last time we experimented with bank reserves below 10% of nominal GDP was in 2018-2019, and this eventually led to pressures in the repo market in September 2019. Pay attention to US monetary plumbing, and bear in mind that fast TGA replenishments rapidly drain bank reserves from the system. Do you think this will matter for markets? 👉 If you enjoyed this post: 1) Drop a like and share it with your network 2) Follow me (Alfonso Peccatiello) to make sure you don't miss my daily dose of macro analysis.

Collab with our senior advisor, Jon Hilsenrath on Fed and market's pricing of future monetary policy. StoneX Strategy: How Markets Are Wrong About Federal Balance Sheet Policies IN SUMMARY: The Fed’s decision to halt balance sheet runoff has been widely interpreted as a step toward policy easing, but that view misses the mark. The move represents a modest tightening of financial conditions. The key lies on the asset side of the Fed’s balance sheet: it will roll maturing mortgage-backed securities into Treasury bills rather than across maturities. This shift reduces risk exposure at the central bank and places more risk in private markets. Future balance sheet growth will not necessarily be stimulative. Unless the Fed expands its longer-term Treasury holdings, a move that appears unlikely given its existing long-duration exposure, balance sheet expansion will simply recycle liquidity into short-term bills, producing no net easing effect. The Fed’s actions are aimed at stabilizing reserves and short-term money market rates, not at loosening broader financial conditions. The asset mix remains heavily skewed toward long-term Treasurys and mortgage securities, far from the pre-QE composition. With less than 5% of the portfolio in bills and nearly 38% in long bonds, the Fed still has years of portfolio normalization ahead. Meanwhile, any marginal easing from the federal balance sheet will come from the Treasury, not the Fed. Treasury’s upcoming refunding announcements will show whether it continues shifting issuance toward short-term bills and away from long bonds, a policy mix that could partially offset the Fed’s gradual tightening bias. **Bottom Line:** The end of QT is not a move toward accommodation. The Fed’s portfolio remains long and risk heavy, keeping policy more accommodative than the fed funds rate suggests. Unless Treasury issuance shortens materially, balance sheet policy will remain a slow drag on liquidity rather than a source of it. StoneX Group Inc.

The themes catch up The 30-year mortgage rate has increased from a pandemic era low of 2.5% to 8% recently. During these last three years, we have tended to put discussion of continued U.S. fiscal deficits and accumulating debt at similar footing as inflationary pressures and the monetary policy rate changes by the Federal Reserve. Now this discussion is becoming mainstream - such as recent Bloomberg stories “Deficit Doubling as US Economy Grows Shows Why Yields Are at 5%” and “The Big Bond Market Event Wednesday Is at Treasury, Not the Fed." Essentially, growing amounts of quarterly refunding by the Treasury department has made it more important for the market to 'price-in' expectations of refunding and if the quarterly announcement is different than expected, it could create short-term volatility. In addition to numerous factors, the U.S. Treasury quarterly refunding announcement would be impacted by the level of Treasury General Account (TGA) balance, which stood at $848 billion (B) as of 10/25/2023, up from a low of $45B as of 5/31/23. This accounts for yesterday’s smaller than expected funding announcement for the fourth quarter, which contributed to a decline in yields, with 10-year yields declining by 0.2% versus 0.15% for the 2-year yields. The shorter-end was likely more impacted by the Federal Reserve on the same day keeping its monetary policy rates steady. Over this year, the refunding amounts have increased in line with deficits thus far, up from $222B in January 2023 to $255 in October 2023. In yesterday’s announcement, T-Bill issuance in the fourth quarter will be $416B, down from $678B in the third quarter. That is, going forward there is less room for the Treasury to borrow money by overly relying on the short-term T-Bills. Finally, the forecasted 2024 budget deficit of $1.5T to $1.9T (and similar amounts in the following years) will need to be financed by increased borrowing, which longer-term could put further upward pressure on Treasury yields. In this uncertain world, there is one thing we can be sure of: risk management and hedging needs in interest rates will likely continue to remain elevated for the foreseeable future.

It was a delight to chat with Eric Wallerstein at the Wall Street Journal about the bond market and Treasury supply. In its November Refunding announcement, Treasury kept the share of short-term bill issuance near 60% of debt issued, far above historic norms closer to 20%. By extending its reduction of longer-term bond duration supplied into the market, Treasury is offsetting much of the increased supply of duration provided by the Federal Reserve's balance sheet reductions. The line between fiscal policy and monetary policy is becoming increasingly blurred as the Fed engages in fiscal policy or the Treasury engages in monetary policy, depending on perspective. The net effect, relative to investors' expectations at the end of October, is to significantly loosen financial conditions. This loosening runs the risk of reaccelerating a still-tight economy and generating renewed upward pressure on inflation. https://lnkd.in/eEakHJMY