Treasury Refunding Preview: What to Watch

Based on our deficit forecast, the outlook for the Federal Reserve's redemptions of Treasury securities and our cash balance projections, we believe another acrossthe- board increase in nominal coupon auction sizes is unlikely at the upcoming quarterly refunding on January 30, and possibly for the next few refundings.

Instead of an increase in nominal coupon auctions, we expect the final details of the overhaul to the TIPS program will be announced, resulting in additional net TIPS issuance of $26 billion in 2019.

What could lead to larger auction sizes than we currently expect?

o Federal Reserve balance sheet reductions lasting longer than we anticipate

o A deteriorating economic outlook

o Fiscal policy changes leading to a larger budget deficit

We look for net issuance of T-bills in Q1 to be $158 billion. The debt ceiling reinstatement makes things a bit more interesting than the quarterly total suggests and could lead to a backloaded jump in T-bill supply. Late February through the end of March is poised to see a surge in net T-bill issuance, potentially to the tune of about $175 billion over a six-week stretch.

Complicating matters further, there is higher-than-usual uncertainty this year when it comes to Q1 cash flow for the government given that this is the first tax season under the Tax Cuts and Jobs Act and the government remains partially shutdown. Unexpected swings in receipts/outlays would likely have a large impact on T-bill issuance and could disrupt money markets in late Q1/early Q2.

In sum, we expect money markets to be volatile for the next few months. They should be tamer than a year ago, but still wild enough to cause angst.