Treasury financing estimate and refunding details take centre stage

US markets

In a week characterized by an array of impactful macroeconomic data, policy decisions, key earnings reports, and geopolitical developments, some argue that the Treasury financing estimate and refunding details take center stage as the most crucial event.

The significance of these details lies in the borrowing estimate, where lower figures are preferred. Oversupply concerns were front and center during the late-summer bond rout, triggering a rapid repricing of the term premium out of negative territory and prompting a challenging bear steepener that adversely affected equities.

Recognizing these negative implications, Janet Yellen, the Treasury Secretary, made proactive adjustments. By slashing the quarterly borrowing estimate for the October to December quarter last October 30, she set the stage for smaller-than-expected coupon increases in the subsequent refunding details, fueling a sustained rally in both bonds and stocks through year-end.

I guess the question is, will we see another Yellen -Powell dovish tag team similar to what happened last year?

Monday's estimate reflects the second consecutive quarter where the financing projection has been reduced from the original forecast. Should the Treasury again fall short of expectations for coupon increases on Wednesday, Yellen's actions will have paved the way for further upside potential in equities. This alignment between bond market optimism and equity valuations signals a bullish sentiment or, at the very least, offers a protection buffer for stretched multiples.

Last year, the Treasury anticipated Q1 borrowing to reach $816 billion; however, the current estimate has been revised to $760 billion. This adjustment has led to a positive response in bond and stock markets, with US yields trading down 7-10 bp as the lower borrowing needs are perceived very favourable for global stocks, with the S&P500 breaking fresh higher ground and making new summit records.

Moreover, this development is expected to exert downward pressure on the US dollar, albeit at the margins. The reduced borrowing requirements signal improved fiscal conditions, which may dampen the US dollar's attractiveness relative to other currencies in the foreign exchange market.

Overall, the Treasury's downward revision of Q1 borrowing needs is anticipated to impact global financial markets positively.

China

The need for fiscal measures, rather than monetary adjustments, in China has been emphasized repeatedly. Despite recent RRR cuts, which primarily affect credit supply, they fail to address the fundamental issue of restoring consumer confidence. China will likely be mired in a deflationary funk all year, with GDP expected to slink to the low 4 %

Fiscal stimulus is deemed necessary but unlikely to happen as that side of the stimulus equation also faces challenges, particularly concerning over-leveraged local government funding vehicles. It may require federal intervention to manage restructuring and ensure efficient implementation of stimulus measures.

Skepticism persists regarding the equity plunge protection plan. While measures akin to a band-aid on a broken leg may temporarily boost stock prices, they do little to stabilize earnings or foster growth.