TBAC-O Road? Treasury Announces Big Cut In Borrowing (Despite Skyrocketing Deficits) But Shifting Towards More Expensive, Higher Duration Coupon Bonds

Constitution Avenue in Washington DC is actually becoming Tobacco Road. No, not the dysfunctional family of Georgia sharecroppers during the Great Depression, but the Treasury Borrowing Advisory Committee (TBAC).

On Monday, after we got the first part of the Treasury’s Quarterly Refunding Announcement (QRA), in which the Treasury unexpectedly announced a big drop in its borrowing estimates for Q1 (from $816BN to $760BN) coupled with a shockingly low calendar Q2 borrowing estimate of just $202BN (as a reminder we got the second part of the QRA this morning which came in very much as expected)…

… yields tumbled as this was viewed as an aggressively dovish outlook on the future of i) the US fiscal deficit and ii) the debt needed to fund said deficit. Here is another way of visualizing the US historical and projected marketable debt funding needs:

Commenting on this surprise drop in expected borrowing, on Monday we said that “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.“

Boy, were we right: earlier today, in the Treasury’s presentation to the Treasury Borrowing Advisory Committee (TBAC) as part of the Quarterly Refunding, Janet Yellen revealed what the composition of this sharp drop in Q2 funding needs would be. As we expected, it was all bills!

In fact, as the chart below – which we have dubbed the scariest chart in the Treasury’s presentation to TBAC today (link here) – shows, with Bills expected to fund some $442 Billion of the $760BN funding deficit in the Jan-March quarter (the balance of $318BN funded by coupons), in Q2 the Treasury now anticipates a $245BN DECLINE in net Bills outstanding (i.e., not only no incremental Bill funding but a quarter trillion maturity in Bills outstanding). In other words, while we expected a “sharply lower” Bill issuance in Q2, the Treasury is actually expecting a $245BN drawdown in Bills.

But wait, there’s more: because while the market was expecting some pro rata decline in coupon issuance to go with the slide in net Bills (we were not) in Q2 to justify the sharp drop in long-end yields, it was not meant to be. In fact, just the opposite, because as highlighted in the chart above, net Coupon issuance in Q2 is actually expected to increase by $130BN to $447BN from $318BN in Q1. This is a huge shift in higher duration supply, and is hardly what all those who were buying 10Y bonds on Monday were expecting, and yes, that too was to be expected: with Bills now well above the “comfortable” ceiling of 20% as a percentage of total debt outstanding, the Treasury had no choice but to roll it back, especially since the Reverse Repo is already mostly drained. And sure enough, in its presentation, the Treasury no longer anticipates a flood of Bill issuance in the future.

That’s not all: while the Treasury said it does “not anticipate needing to make any further increases in nominal coupon or FRN auction sizes, beyond those being announced today, for at least the next several quarters”, the TBAC politely disagreed, stating that “it may be appropriate over time to consider incremental increases in coupon issuance depending on how the current uncertainty regarding borrowing needs evolves” (translation: as the need to bribe the population with more fiscal stimmies ahead of November rises, so will borrowing needs).

As for any naive expectations that any decline in issuance in structural instead of merely shifting away from Bills to Coupons, we have some more bad news: as the table below confirms, the Primary Dealer estimate of the US 2024 budget deficit dropped just $22BN in the past quarter, from $1.8 trillion to $1.778 trillion, a meaningless change (expect this number to rise sharply as the full brunt of fiscal stimulus in an election year become visible).

As for the bigger picture, well you can listen to either the Primary Dealers…

… or the CBO:

Both reach the same sad conclusion, the same one voiced by Nassim Taleb on Monday when he said that “we need something to come in from the outside, or maybe some kind of miracle…. This makes me kind of gloomy about the entire political system in the Western world.”

Sorry, Nassim, no miracles… just lots and lots of money printing coming.

And speaking of money printing, the fact that Bill issuance is about to grind to a halt in Q2 means that, just as we expected, reverse repo balances will tumble in the remaining two months of Q1…

… bringing it effectively to zero (which means the Treasury’s stock market liquidity pump is now almost drained), at which point the Fed will have to take over and taper QT as the alternative would be draining some $100BN in reserves every month at a time when total Fed reserves are already at the level which Waller hinted may be the infamous LoLCR floor which is a hard constraint at “10-11% of GDP.” The alternative is simple: a stock market crash just months before the November election, hardly the stuff Biden’s handlers or the anti-Trump Deep State would approve of.

Texas Business Activity Index Falls To Recession-era Reading Of -27.4 (Biden Freezes Natural Gas Exports)

Texas is a state of mind and is currently under invasion. Encouraged by BIG AGRA Senator Lankford (RINO-Oklahoma).

Texas factory activity contracted in January after stabilizing in December, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, dropped 17 points to -15.4—its lowest reading since mid-2020.

Other measures of manufacturing activity also indicated contraction this month. The new orders index ticked down from -10.1 to -12.5 in January, while the growth rate of orders index remained negative but pushed up eight points to -14.4. The capacity utilization index dropped to a multiyear low of -14.9, and the shipments index slipped 11 points to -16.6.

Perceptions of broader business conditions continued to worsen in January. The general business activity index fell from -10.4 to -27.4, and the company outlook index fell from -9.4 to -18.2. The outlook uncertainty index held fairly steady at 20.9.

Note that prices paid for raw materials soared by 20.2%.

Meanwhile, The Fed is impressed by the growth in the economy (primarily government jobs) so will likely keep rates constant this week. I wish they would look at Texas slumping!

In apparent retaliation for trying to defend themselves against the mongrel hordes coming from Latin America, Africa, the Middle East and … China, Biden freezes natural gas exports (largely from Texas).

In Washington DC, Lankford, Schumer, McConnell and other anti-America, pro-World Economic Forum type gather to destroy the US.

Taper Tantrum? Bank Credit Growth Negative For 26th Straight Week As Fed Plans End Of QT (Fed’s Balance Sheet Remains Enormous!!)

Oh Susie QT. The Fed loves you. And The Fed has put a spell on the economy.

Where do we sit today? Bank credit growth has been negative for the last 26 weeks. As M2 Money growth has stalled.

What will The Fed do?

While the FOMC may start the discussions around tapering QT as soon as at this meeting, tapering itself is still a ways off, and the actual end of QT will come early next year.

In January and May 2022, the FOMC published the principles and then the plan for QT. The fact of a taper this year is not news. More recent communication from Fed officials (for example from President Logan and Governor Waller) reinforced a preference for the reverse repo (RRP) facility to be drawn down to zero, and we infer that getting the RRP near zero will be the starting point for the taper.

Historically, the FOMC has taken at least two meetings to finalize these types of plan, and the December minutes stressed a desire to give the market lots of advance notice. As a baseline, we think the FOMC announces the parameters for the QT taper at its May meeting and enacts that taper in June, by cutting the runoff of Treasury securities in half. Because the Fed’s RRP facility has been declining rapidly, that timing could shift earlier by a month or so.

The change to shedding $30 billion per month in Treasuries would slow the pace of runoff materially, but there is clearly a chance that the subsequent pace is even slower. President Logan pointed out that running off the balance sheet slowly could ultimately allow the Fed to shrink the balance sheet even more while mitigating the risk of money market disruptions. A June taper would be consistent with our house view on the path of the RRP facility, which we expect to stand at approximately $225 billion at the end of May and be depleted by August.

We anticipate that reserves will remain broadly around current levels until RRP is depleted. But from there, we think reserves will ultimately fall to roughly $3.2 trillion, around $300 billion below current levels, and the FOMC will call off QT in early 2025. That view on the ending level of reserves reflects our outlook on the SOFR – IORB (Secured Overnight Funding Rate – Interest on Reserve Balances) spread turning positive, indicating the end of abundant reserves.

For broader markets, however, our strategy team does not expect the tapering and end of QT to be a significant event. Our rates strategists think the phenomenon is mostly in the price and, if anything, front-end swap spreads may have already overreacted to the news of an early taper. With a limited effect on rates, and the tapering and end of QT largely anticipated, our MBS and credit strategists similarly see few if any implications. Of course, some market narrative is focused on QT’s effects on the banking sector. While the intuitive notion that QT must destroy deposits is widespread, we have highlighted the data which show in fact that deposits have edged up, not down, in recent months as QT has progressed. Banks can always choose to bid for wholesale deposits, so instead of focusing on the quantity of “money” and how that changes, a better question is how bank funding costs are evolving.

So, the next step is for the Fed to shift from “talking about talking about tapering QT” to actually talking about tapering QT. Only after that step will we start to look for the end of QT, which the Fed will determine with an eye on money market conditions. In particular, the Fed is looking at whether SOFR is trading below the rate the Fed pays on reserves, in which case it will likely judge conditions to be accommodative, or above the rate the Fed pays on reserves, in which case the Fed’s calculus will change and the discussions about the end of QT will pick up steam.

The Fed’s balance sheet remains greatly expanded despite the increase in The Fed’s target rate. Nothing has been the same since the banking crisis of 2008-2009. And Covid in 2020.

Bidenomics Has Added $1.78 TRILLION In Public Debt But REAL Avg Hourly Earnings Declined By -1.3% (Don’t Stand Too Close To Joe!)

Here comes the Federal government, spending and borrowing like insane people then presenting us with the bill.

Only The Federal government and Joe Biden would borrow $1.78 TRILLION, producing REAL average hourly earnings that are -1.3% lower.

Meanwhile, Obama and his wife Michelle are singing “Don’t stand to close to Joe!”

Will “Animal Spirits” Force “Dovish Trifecta” Off-Course? (Will The Fed Misread Soaring Stock Market And Make Yet ANOTHER Policy Error??)

It smells like … ANIMAL spirits.

The last week or so has seen a tactical ‘hawkish’ reversion in USTs and STIRs to play for a re-pricing lower in March rate-cut expectations, following the recent ‘hard-data resiliency’ with Consumer and Labor, alongside modestly “hawkish” rhetoric (despite soft data weakness)…

And, as Nomura’s Charlie McElligott highlights this morning, we are also seeing new upside being bot in SOFR Options for “dovish outcome”-hedging again, with Core PCE looming later this week.The market has had bunches of March SOFR Downside structures trading over the past few weeks to play for “Fed cut overshoot,” which has been the right trade YTD, as the implied probability distribution shows March Fed cuts now having been slashed by over half the the past week and a half (~80% priced to now just ~40%), and accordingly now we’ve witnessed some monetization of tactical Downside in recent days…

And we see the swaption surface getting mushed…

As he notes, the “dovish-trifecta” right-tail repricing has gotten us to ~4900… and, he says, the actual “realization” could then certainly push us through 5000:It’s my expectations that we could very well see:1) “March Fed cut” to pick-up Delta again after what is expected to be a “light” core PCE print this Friday…and taking back pricing following the past week’s Fed speak pushback and “too resilient” Labor- and Consumer- data, which has driven March Fed meeting “cut” probabilities being sliced in half over the past one week (~80% on 1/12/24 to today’s ~40%)The next potential dovish catalyst is 2) the QRA est / announcement end of Jan / start Feb, with “binary risk” implications on the direction of Duration and Risk-Assets, as the market generally anticipates resumption of larger Coupon issuance from the US Treasury ahead—but what if there is one final announcement where Bills stay high, Coupon increases but isn’t as large as most anticipate, AND Yellen signals that this is the final expected Coupon increase?!

While we’re at it and relate to the Treasury’s QRA discussion, let’s not forget the “other” market- and economic- backstop being applied by the Biden Administration (and aided by what looks to be Janet Yellen’s “politically activist” US Treasury with TBAC sign-off) – which is the continued willingness to run large fiscal deficits in an attempt to “run the economy hot” in this election year, with much of it being “paid for” via Bills (so to prevent long-end Rates from pushing higher, which would tighten US financial conditions)……this is Green build, CHIPS Act, and even fresh “election surprises” like Biden announcement Friday on “forgiveness” of a fresh $5B of student loans, now making the total loan forgiveness approved by the Biden admin $136.6B

And finally as a derivative of the above mention, another hypothetical Treasury QRA where we’d see “Bill issuance remaining high, yet with Coupon increases not as large as most anticipate” would then mechnically see MMF’s continuing pulling from RRP to buy Bills, which will further accelerate the RRP drain…and as outlined in recent weeks, “low” RRP levels will act as “a” key input to Fed reaction function on determining LCLoR……which will ultimately mean 3) a pulling-forward on the market’s expected timing on the “end of QT”

This “dovish-trifecta” is the macro catalyst behind the “right-tail” scenario which has appropriately been repriced higher by the market over the course of the past month, and we’ve seen clients allocate some protection spend to this “crash-UP” scenarioAnd again, IF the above were to realize… without negative catalysts (Earnings fine, no further Rates selloff / Fed repricing, continued disinflationary trajectory rebuilds “Fed cut” implied probability) around that upcoming Feb VIXpery with all that Dealer “short VIX Calls” positioning being hedged… there is absolutely potential for an Equities slingshot if there are no issues and those customer “Long VIX Calls” bleed-out, which will mean Dealers puke out their UX1 Longs (as hedges) back into the market for a potential “kicker” to goose Spot Equities even higher…For now, no-one is worried about downside based on VVIX being back near post-COVID lows…

So what then is the largest DOWNSIDE RISK to Equities?

Outside of “Mag 7” guidance disappointments, I believe the next worst-case scenario for current positioning in Stocks would be an “Animal Spirits” US data reacceleration which forces the above “dovish trifecta” off-course and blows-out the recently calming “Fed Rates path” distribution again:Why would resumption of better US growth data negatively impact US Equities consensus thematic / singles positioning?Because after the 4Q23 de-grossing of short books and forced “Net-up” to stop the bleed and chase (massive squeeze & cover in low quality / cyclical value / leveraged balance sheet / high short interest “junk”)….2024 YTD has instead seen the market reset the prior “Momentum” regime of “Long Quality / Size / Secular Growth” i.e. MegaCap Tech, while re-shorting that economically-sensitive “low quality / junk” stuff againIn a world of slowing but positive growth to 2% GDP and now with 3m inflation annualizing sub 2% target…you go back to that “QE of old” 2010s -decade playbook of “long stuff that can grow earnings and profits without needing a hot economic cycle”…i.e. long quality, size (liquid) & secular growth / short leverage & cyclical valueBut IF we see the “animal spirits” data reacceleration off the back of the massive FCI easing that the Fed and Treasury have facilitated, plus the persistent wage growth and still too strong labor meaning consumption remains robust, along with ongoing govt fiscal stim / spending…

..we risk a chance of inflation pivoting away from the current disinflationary trajectory (God-forbid actual “reflation”) which would could see that “long secular growth / short econ sensitive / cyclical value’ trade get a shock reversal…

…as long-end Yields and accordingly then, financial conditions, re-tighten and smash the “high valuation” Quality / Secular Growth stuff, while the heavily hated / shorted Cyclicals would painfully squeeze higher.Don’t forget, we’ve seen that happen before (yes we know the magnitudes of the inflationary impulse are different, but the timing of the human-emotion/monetary-policy-over-confidence double-rip in inflation is unquestionable)…

So, be careful what you wish for from higher and higher all-time-highs for stocks – the stronger they look (on the back of dovish expectations), the more likely The Fed is to hold back the actual dovish actions so much hope is founded on.

Bailout Part Deux? Prepare For “Very Ugly” Two Years Of CRE Turmoil With $2.5 Trillion In CRE Debt Maturing In Next 5 Years

Remember the massive bank bailout of “subprime” mortgage securities back that resulted in the Dodd-Frank banking legislation of 2010? Yes know, where they promised NO MORE BANK BAILOUTS EVER??? Particularly if Disease X is unleashed and we start shutting down economies and schools again. Will we see ANOTHER bank bailout??

Cantor Fitzgerald CEO Howard Lutnick spoke with Fox Business host Maria Bartiromo on the sidelines at the World Economic Forum in Davos, Switzerland, last week. He offered a bleak outlook on the commercial real estate sector, warning a “very ugly” two years is ahead.

“Coming due in the next two and a half years at these higher rates – you’re not going to get proceeds, meaning when you have a $120 million loan on a building, and someone says I’ll give you 90 million at a much higher rate – than it throws the keys back to the lenders – and there’s going to be a lot of them that are going to get wiped out,” Lutnick told Bartiromo.

“I think $700 billion could default … The lenders are going to have to do things with them. They’re going to be selling. It’s going to be a generational change in real estate coming at the end of 2024 and all of 2025. We will be talking about real estate being just a massive change,” Lutnick said.

He warned: “I think it’s going to be a very, very ugly market in owning real estate over the next, you know, 18 months, two years.”

Lutnick noted that loan sales are set to become a major business opportunity with the upcoming maturity of CRE mortgages. He highlighted that an estimated trillion dollars of CRE debt is coming due over the next 2.5 years.

Shortly after the regional bank implosion in March 2023, Morgan Stanley penned a note to clients about a $2.5 trillion wall of CRE debt coming due over five years.

A recent survey of Terminal users by Bloomberg’s Markets Live found most respondents believe the office tower market needs a deeper correction before a rebound materializes.

Lutnick pointed out, “Real estate equity, REITS, are going to be in trouble … a lot of them are going to be wiped out, so many defaults, I think.”

Bloomberg office REITs have been plunging since early 2022 when the Federal Reserve embarked on the most aggressive interest rate hiking cycle in a generation to tame inflation.

“Commercial real estate is experiencing a meaningful repricing as cap rates correlate to long-term to interest rates,” Morgan Stanley told clients in a recent report, adding, “Patience is required while refinancing to higher debt costs gradually triggers valuation adjustments.”

Lutnick’s not the only one with a dismal outlook on CRE.

In a recent interview, Scott Rechler, Chairman and CEO of RXR Realty, told Goldman’s Allison Nathan that the CRE downturn is still in the early innings.

Biden Brags About Mortgage Rates Dropping In 2024 (Inside Info On Disease X?? Or Admission That The Economy Actually Sucks)

As only Clueless Joe can do, Biden brags about something that he has nothing to do with: falling mortgage rates.

Mortgage rates (30-year conforming rate) are up 392 basis points or a whopping 142% under Biden. Mortgage rates are down from the 2023 peak of 7.83% to 6.69% as of yesterday. One reason that mortgage rates are stable is that M2 Money GROWTH has been negative since the end of 2022.

Of course, it is The Federal Reserve acting to slow down inflation caused by excessive Federal government spending that is leading to mortgage rates declining, not Biden’s open border policy or his green agenda.

But for the future, does Biden know something that we don’t know? Like is Biden buying into the hypothetical Disease X (20 times worse than Covid) that was discussed in Davos at the World Economic Forum. If a major pandemic is unleashed (again) in the election year, The Fed would have to cut rates (again) to offset the damage done by another round of goverment economic shutdowns. Not to mention the shutting down of schools again.

Or did Biden just tell us that he knows the US economy is slipping and The Fed will come riding to the rescue of Biden (or Newsom or Michelle Obama) like in an old John Ford western with John Wayne. That would also lead to declining mortgage rates in 2024.

But all is not well in the banking sector. Use of Fed funding tool jumps most since April to fresh record: Banks borrowed record sum of $161.5bn from Fed’s Bank Term Funding Program, w/demand at $14.3bn climbing the most in 9 months as they piled into a reliable arbitrage trade just weeks ahead of its scheduled closure.

The availability of mortgage credit remains VERY TIGHT.

Whether its Disease X (unleashed The Kraken!) or just a slowing economy, The Fed (the master manipulator) will likely cut rates in 2024. Making mortgage rates come down.

And what is a dancing sandwich??

Not Always Sunny! Dis-Inflation & Disappointment For Philly Fed Survey In January (-10.6, Worse Than Expected)

It’s not always sunny in Philadelphia! And not because the Eagles got stomped by Baker Mayfield and the Tampa Bay Bucs.

Manufacturing activity in the Philadelphia region continued to decline in January (for the 18th month of the last 20). The headline Philly Fed survey printed -10.6 (worse than the -6.5 expected) and apart from the insane outlier spike in August, this indicator screams recession…

Source: Bloomberg

More worrying is the fact that hope appears to be dwindling fast as the six-month-forecast for the survey plunged back into contraction (from +12.6 to -4.00)…

Source: Bloomberg

Philly Fed’s demise is consistent with the collapse of hope as ‘soft’ survey data has slumped in the last month, back to its weakest since July (as ‘hard’ data improves relative to expectations)…

Source: Bloomberg

On the bright side for the doves, the dis-inflationary trend remains in tact as priced paid and prices received both plunged in January. However, we highlight the fact that Philly businesses expect price pressure to return in the next six months…

Source: Bloomberg

Overall, the ‘bad news’ in this report should buoy stocks and bonds (lower inflation and lower growth enables sooner and faster cuts)… But will it.

Green man (The Federal Reserve) will stike again!

WTF are dancing sandwiches??

Biden In Wonderland! Savings As Percentage Of GDP Goes Negative As Consumer Still Cope With Inflation Of Over 4.50% (But At Least Yield Curve Is Normalizing!)

President Biden still shuffles around mumbling about Maga Republicans and defending democracy (while gettig his DOJ and affiliates to prosecute his leading Presidential opponent) even though …. consumers continue to struggle. While Biden is in wonderland, American consumers are in hell.

Savings as a percentage of GDP is actually NEGATIVE as sticky price inflation remains above 4%.

Any good news? At least the US Treasury yield curve (10Y-5Y) is normalizing.

How true!

Speaking of Biden, is this photo real? With AI, I wonder.

Fed Better Think Twice About Rate Cuts! 10-year Treasury Yield Surges To 4.10% After Strong Dec Retail Sales (Consumers Win, Fed/Treasury Lose)

The Fed had better think twice about expected rate cuts. The market just isn’t feeling it.

Treasury yields rose Wednesday, with the 10-year yield touching almost 4.10% as investors focused on stronger-than-expected December retail sales and the latest remarks from Federal Reserve members.

The yield on the 10-year Treasury note was recently up 4 basis points at 4.108% after briefly getting to 4.117%, the highest since Dec. 13. The 2-year Treasury yield rose by around 11 basis points to trade at 4.335%.

December’s retail sales data indicated strong consumer demand at the holidays. Retail sales increased 0.6% for the month, above economists’ estimates of 0.4%, as compiled by Dow Jones. Excluding autos, sales rose 0.4%, which also topped a 0.2% estimate.

On Tuesday, yields jumped after comments from Federal Reserve Governor Christopher Waller, who suggested that while the central bank will likely cut rates this year, it may take its time.

At the World Economic Forum in Davos, more European Central Bank members indicated that markets were getting ahead of themselves on rate cut projections.

The president of the Dutch central bank, Klaas Knot, told CNBC Wednesday that the euro zone’s central bank looked at overall financial conditions, and that “the more easing the market has already done for us, the less likely we will cut rates.” Knot was referring to the fact that higher stock and bond prices in the fourth quarter of last year acted as the equivalent of easier interest rate policy, while lower prices act as the equivalent of tighter policy.

Rising interest rates are going to bite a big chunk out of The Fed’s massive ass (I mean balance sheet). Of course, The Fed sends the bill to Treasury. Gee, no wonder Biden/Yellen want so much money!

There is something wrong with letting aging politicians like Biden (81), Grassley (90), Pelosi (83), etc. borrow vast sums of money to spend when they will likely not be around for another 10 years.