Respecting the Pump
Treasury Refunding and Its Impact on Asset Prices
The bond market has been experiencing notable volatility, predominantly due to a phenomenon known as a bear steepening. This situation arises when short-term interest rates remain stable, but long-term rates rise precipitously. We attribute this volatility largely to an increase in the supply of long-duration assets, propelled by a growing budget deficit and the expectation of ongoing Treasury issuances.
While this bond market downturn has posed challenges for a variety of risk assets, crypto and gold have distinguished themselves by resisting this bearish trend.
Just yesterday, the Treasury revealed its intention to borrow $776 billion in the forthcoming months. In a surprising admission, officials recognized that the issuance of long-duration assets has been a factor in the uptick of interest rates. Furthermore, they signaled a shift from their traditional practice, which typically sees a 15-20% allocation of Treasury issuances to short-dated bills. In a move aimed at enhancing market liquidity, they intend to scale back the issuance of long-term bonds relative to bills.
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