Next week, the US Treasury Department plans to announce the “quarterly refinancing” (quarterly refinancing) treasury bond issuance plan for the next quarter. After increasing the scale of financing for three consecutive quarters, the market is closely watching this quarter's financing, repurchase plans, and whether Treasury Secretary Yellen will provide further guidance on long-term financing strategies.

Currently, the market generally expects that the size of treasury bonds issued under this tender plan will remain unchanged. However, a series of interesting data may suggest that the US Treasury may unexpectedly lower funding expectations — this will cause debt market bears to be squeezed.

Is the US Treasury “rich”?

As of next Monday (Treasury funding forecast update) and Wednesday (full financing plan release), data shows that the current cash level of the US Treasury far exceeds the upper limit of the previous forecast.

Specifically, in its latest quarterly funding forecast for the end of January, the US Treasury estimated that the cash balance for March 31 and June 30 was 750 billion US dollars, but due to unexpectedly high capital gains tax revenue on April 15, the Treasury's cash level increased dramatically. As of yesterday, the Treasury's general account had about $955 billion in cash, which is 205 billion dollars more than expected.

Although this figure is far less than the $1.6 trillion general account balance in early 2021, compared to the “dilemma” where the general treasury balance was almost zero due to the debt ceiling struggle in October last year, the Treasury's “book funds” currently provide a significant buffer for the Treasury Department and the Federation.

Yellen may unexpectedly lower funding expectations

In the context of “having surplus food on hand,” there is no urgent need for the Ministry of Finance to issue short-term treasury bills and empty reverse repurchase facilities. In other words, there is no need to reduce America's systemic liquidity to dangerous levels that could trigger financial alarms and/or banking crises.

Nomura strategist Charlie McEligott believes that theoretically speaking, in the current context, the US Treasury can reduce debt issuance during next week's “quarterly refinancing” — and this can actually provide a large amount of liquidity to offset any short-term quantitative austerity.

This will certainly be a “surprise” for the market, but McEligott is “very sure” that this will happen, and therefore believes that the market's expectations for this are too low.

McEligott added that if the US Treasury announces a reduction in debt issuance next week, it will help stop interest rates from rising further, and may even become a catalyst for “risk appetite” in stocks and a wide range of assets.

Bond-market bears may be squeezed

McEligott also said that as the Treasury's next quarterly financing announcement is due to be released on April 29 and May 1, “Yellen may bring a 'low' financing expectation to the market due to strong tax revenue (wage growth and huge capital gains over the past year).

Against a backdrop where US Treasury short positions are indeed close to record levels, this has helped to push bond bears once again into a squeeze and boost risk sentiment. (As shown in the chart below, US Treasury bond short positions are indeed close to record levels, and only a small amount of stimulus can trigger a chain of bears squeezing.)

It is worth mentioning that financial blogger ZeroHedge commented that many people originally expected the Federal Reserve to start cutting interest rates in May or June — this is widely viewed as the last possible time to enter the pre-election phase and avoid being accused of interfering in the election — yet as the level of inflation rises, it may be difficult for the Fed to start cutting interest rates as the market would like.

However, Yellen, who has “plenty on hand,” may come forward as early as April 29 to help the Biden administration get through difficult times. At that time, the US Treasury Department will announce a drastic reduction in capital requirements for the next 3 to 6 months, which will lead to falling yields, squeezing short positions, and rising stock markets.

Editor/Somer