The Treasury will issue a refunding announcement on May 1, detailing three months of borrowing requirements and the balance held in the Treasury's general account.
The market took solace from the fact that total bond issuance is likely to fall for the first time in two years.
If the TGA target remains at or below the current $750 billion, risk assets could rally.
The past few weeks have been rather boring for cryptocurrency traders as Bitcoin (BTC), the leading cryptocurrency by market cap, has been mostly trading between $60,000 and $70,000.
However, the broader uptrend could soon resume as analysts expect U.S. Treasury Secretary Janet Yellen’s quarterly refunding announcement (QRA) next week to ease pressure on risky assets.
The announcement details the U.S. government’s three-month borrowing needs, which have become critical in a post-coronavirus world of record debt, rising inflation and interest rates. The announcement also discloses the size and maturity of bond issuances, as well as the balance held in the Treasury General Account (TGA).
Bond issuance plans affect markets through the yield channel. An increase in bond issuance, or supply, depresses bond prices and raises yields (the so-called risk-free rate), which in turn discourages risk-taking in financial markets. A reduction in issuance would have the opposite effect.
In a previous announcement on January 29, the Treasury forecast net borrowing of $202 billion in net current debt in the second quarter, with a TGA cash balance of $750 billion. This was a sharp drop from net borrowing of $760 billion in the first quarter. Financing needs are typically lower in the second quarter as tax payments fill government coffers.
Saxo Bank said the upcoming QRAs could bring relief, with total quarterly issuance set to fall from a peak of $7.2 trillion for the first time in two years.
“Given upcoming note and coupon redemptions, as well as the latest Treasury funding estimates, total U.S. Treasury issuance is expected to decline for the first time since the second quarter of 2022,” Althea Spinozzi, head of fixed income strategy, said in a QRA preview.
“Market focus therefore turns to the announcement regarding the level of the Treasury General Account (TGA),” Spinozzi added.
Total quarterly issuance is expected to fall from a peak of more than $7 trillion. (The Wall Street Journal, Securities Industry and Financial Markets Association) (The Wall Street Journal, Securities Industry and Financial Markets Association)
The TGA is an operating account maintained by the U.S. government at the Federal Reserve to collect taxes, duties, proceeds from securities sales, revenue from the public debt, and to make government payments.
TGA is a liability on the Fed's balance sheet that must be matched with assets. When the Treasury depletes TGA balances, funds are transferred from TGA accounts to the bank accounts of individuals and businesses, increasing the available reserves of commercial banks. This in turn increases lending, leading to an easing of monetary policy in markets and the broader economy. An increase in TGA balances would have the opposite effect.
The Treasury depleted its TGA balance as part of extraordinary measures implemented to keep the government running amid the debt ceiling drama in early 2023. This kept risk assets, including cryptocurrencies, on a bullish trajectory.
Spinozzi believes that if the QRA maintains the TGA target at $750 billion or lowers it, risk assets could rise.
"If the TGA remains at its current level of $750 billion or lower, it would mean that either nothing will change, or more money could be released into the economy, boosting activity. This could lead to bullish sentiment in risk assets such as stocks and lower-rated corporate bonds," Spinozzi noted.
On the other hand, if the debt announcement is in line with expectations but the TGA target is raised, it would mean the government intends to hold more cash. Such an outcome may not bode well for risk assets.
The recent tax payments have pushed the TGA balance past the $750 billion target and close to $1 trillion. (Macro Micro) (Macro Micro)
Arthur Hayes, co-founder and former CEO of cryptocurrency exchange BitMEX and chief investment officer at Maelstrom, who predicted weakness ahead of Bitcoin’s halving, expressed a similar sentiment on X.
Hayes explained that the Treasury could stop issuing long-term Treasury bonds, exhausting the current $1 trillion TGA balance, or issue more short-term notes and release liquidity through the RRP (reverse repurchase agreement) facility. Yellen could also combine the two, resulting in a flood of liquidity.
“If any of these three options occur, expect the Stokes to rebound and most importantly, the#cryptobull run to re-accelerate,” Hayes said.
The RRP, one of the Fed’s liquidity management tools, has been exhausted since 2022.
Outstanding overnight (ON) reverse repurchase agreements represent excess cash parked at the Fed. Since 2022, balances have been rapidly depleted, falling from more than $2 trillion to less than $500 billion, according to data source MacroMicro.
