Crash helmets and life vests
Total tax revenues grew in September but outlays grew more. The Federal deficit is trending toward an annual rate of $2.7 trillion, which translates to a quarterly average of $675 billion in net new Treasury supply, with no improvement on the horizon. This is a crushing burden for the Treasury market, which should cause bond prices to trend lower, and yields to trend higher, indefinitely.
The Treasury can play games with its enormous cash pile by using it to do larger buyback operations, or simply slow or stop issuing paper for a few months. However, despite holding over $900 billion in the TGA, at the current depletion rate, that cash would be gone in 4 months.
Unlike the Fed, Treasury market interventions have limits. No doubt Mr. Non Intervention Warsh will sit on his hands for as long as possible.
The current borrowing rate would bring the debt ceiling into play, around xxxxxxx. At that point the Treasury must start to deplete its cash to hold the debt at the ceiling level. Normally, the cash would be gone in 4 months, but the imposition of the debt ceiling projects to coincide with the March-April tax windfall period, which normally creates a cash bulge that lasts until May. That’s approximately when the xxxxx clock would start, less any February drawdown. The cash might therefore last until xxxxxxx before the crunch of needing to start issuing debt again begins.
Whether the government can play games long enough to sustain the markets to reach next summer is an open question. The supply pressure has been relentless, and the fall in bond prices is on the brink of possible acceleration. A breakout above xxxx in the 10-year could lead to disorderly cross-asset liquidation.
Therefore, we need to stay laser focused on the 10-year yield. A breakout could trigger market crisis. The next step would the Warsh Hesitation before the Fed intervention. Every day that he resists intervening is a day of growing crash risk that would become increasingly challenging to reverse. This report examines the current revenue and outlay trends, and develops a risk timeline.
As for the here and now, I still wouldn’t want to xxxx xxxx, and xxxxx stocks at this point is a xxxx. I would xxxx xxxxx risk xxxx a safety net just below.
The next 9 months will be interesting.
This report is only part of the story. We look at other aspects of both the supply issues and the demand side in other regular updates in this series.
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