Something for your Espresso: The Trump bet has disconnected bond yields from reality
The US Treasury has lowered its borrowing estimate for the current quarter to $546 billion, down from the $565 billion projected in July, while maintaining its year-end cash balance target of $700 billion. This reduction is primarily due to a larger-than-expected cash balance at the end of September.
Looking ahead to the first quarter of 2025, the Treasury expects to borrow $823 billion, assuming an $850 billion cash balance, which would represent the largest nominal borrowing for that quarter. These estimates are contingent on Congress raising or suspending the debt limit, which is expected to be reinstated in early 2025.
It seems plausible that the Treasury has chosen to tap into the Treasury General Account (TGA) rather than issue more debt. Drawing down the TGA would help support overall liquidity in the system for now. However, it’s important to note that reduced Treasury bill issuance, combined with recent weak auction results for both 2-year and 5-year bonds, could hint that the ON RRP will not drop further from here, which would be a strain on liquidity.
Chart 1: Bond auction sizes
The Trump bet is driving everything in the markets, with bond yields rising while oil prices are plummeting. It seems likely that this disconnect could continue into next week, paired with upcoming softness in European inflation numbers.
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