reSee.it - Tweets Saved By @PauloMacro

Posted - October 15, 2023 at 6:10 AM

Saved - October 15, 2023 at 3:40 PM

reSee.it AI Summary

US Treasury debt has increased significantly over the past four years, with a deficit of $1.7T as of 9/30. Many expect the deficit to narrow in 2024, but they underestimate the EM nature of the US. Yellen's strategy involves draining RRP instead of bank reserves to manage liquidity. The TGA has increased to $700b, while the Fed's balance sheet has decreased. The deficit would worsen in a recession, crowding out other asset funding. Yellen may accelerate TGA build-up to prepare for recession, elections, and the debt ceiling. Funding through bills shortens UST duration but increases fiscal stress.

@PauloMacro - Paulo Macro

Thread on UST funding and RRP. Backdrop: US treasury debt outstanding has gone from $22.7T to $33.2T over the past four years (9/30/19 to 9/30/23), and 30.9T a year ago. So +$2.3T 1y and +$10T 4y. The -12m deficit is $1.7T per below, as of 9/30 (Treasury is on a Sept FY) 1/18 https://t.co/RRzl9qZNnB

@PauloMacro - Paulo Macro

Many expect this deficit to narrow in 2024 and things to “slow down” or stabilize vis-a-vis Treasuries but they simply do not appreciate the EM nature of the US now. 2/

@PauloMacro - Paulo Macro

I was surrounded by bears back in May and maybe the first to say that the “liquidity suck” fear (once the debt ceiling was resolved) was overblown because Yellen would call bill auctions and slow-walk the TGA refill by draining RRP instead of bank reserves… 3/

@PauloMacro - Paulo Macro

You have liquidity pumping from TGA drawdown which may end with a debt deal and jar risk a bit (very near term) as Yellen calls a few auctions, but the reaction will be overdone because a bit of RRP drawdown takes care of those, and once corporate tax receipts hit mid June… 2/

@PauloMacro - Paulo Macro

And elaborated here (and subsequently many times) 4/

@PauloMacro - Paulo Macro

Ah yes, ink is still drying on Biden’s signature and the histrionic gnashing of teeth about TGA liquidity suck begins. Remember my view - Yellen needs to bridge to 6/15, then slow walks it. RRP draw will help. We get to July without feeling this. 1/ https://t.co/Nuosrq1yj2

@PauloMacro - Paulo Macro

A review of where we stand vs May (right before debt ceiling resolved): -TGA is $700b vs $50b (+$650b) -Fed b/s is 7.9T vs 8.4T (-$500b) -RRP 1.15T vs 2.25T (-$1.1T) -Bank reserves ~flattish $3.3T 5/

@PauloMacro - Paulo Macro

Putting aside reserve identity and eurodollar discussions for a moment. What comes next is much simpler IMO… and once again non-consensus. The Fed must be cognizant of potential bank insolvencies that risk becoming liquidity events like First Republic and SVB. 6/

@PauloMacro - Paulo Macro

Treasury is also sensitive to this, and aware that should the US succumb to recession in 1H24, just ahead of an election, that they need to do what they can to have as little impact on the market as possible from the standpoint of *liquidity*. 7/

@PauloMacro - Paulo Macro

The reality is the deficit would blow out in a recession at a time when other countries may not be relied upon to buy more bonds (USD FX/geopolitical reasons). This incremental issuance would crowd out other asset funding. 8/

@PauloMacro - Paulo Macro

Yes, UST supply matters. This isn’t 2008 when private assets were levered to the hilt and there wasn’t enough safety paper. There is too much ‘safety’ paper today vs where Fed induced liquidity still stands. 9/

@PauloMacro - Paulo Macro

There are many who seem to think with TGA now back to $700bn that the liquidity drain hinges on Fed QT dripping lower at $60b/mo. The pre Covid days of $300-400bn TGA are history. Early Trump deficits were almost half what they are today… 10/

@PauloMacro - Paulo Macro

…and Treasury paper outstanding was $10T lower. From a working capital perspective $600-700bn is the new floor. But with recession, the deficit explodes and you also need to raise the TGA in advance of the 1 Jan 2025 debt suspension date. Think about the timing here. 11/

@PauloMacro - Paulo Macro

You can’t watch the Fed do another year of -$60b/mo and take RRP down by ~$720b to $400b at elections because asset mkts could panic by then. And on 1/1/25 you need to be fully loaded on TGA for another mudfight. You’re gonna want to go into ceiling negots with $1.5T+ TGA. 12/

@PauloMacro - Paulo Macro

Bank reserves are prob ok down to $2.5T (I have addressed this before here in aggregate). You would think there is ~$800bn room lower here on bank reserves, but not all banks are created equal, and many reserves are in banks that are potentially insolvent. 13/

@PauloMacro - Paulo Macro

My view: banking system gets into “2019 repo trouble” around $2.5T (we can argue $100-200bln here or there among pals). So there is maybe $500bln of room on reserves (still tightening to be sure), and a few hundred yards of room in RRP before crowdouts of CP/paper gets felt. 2/ https://t.co/kcga9mI4TA

@PauloMacro - Paulo Macro

So why would RRP continue to collapse without bank reserves rising to offset? Because TGA needs to go to $1.5T+ by early 24 so Yellen can draw it in the months leading up to elections (give risk assets/sentiment a shot in the arm) and prepare for recessionary spending… 14/

@PauloMacro - Paulo Macro

…all under the cover of filling her up well ahead of the debt ceiling as a “responsible thing to do.” The least disruptive way to prepare for accelerated disbursement in a recession and the debt ceiling is to *accelerate* the TGA build from here. 15/

@PauloMacro - Paulo Macro

Will Yellen actually do this? Who knows. But if you are going to tap the US liquidity pool to prepare for A) recession B) elections C) debt ceiling, you want to do it as soon as possible. 16/

@PauloMacro - Paulo Macro

And the least disruptive way is to fund it out of sequestered reserves (RRP) — this leaves the banks out of it. I expect Yellen to double down on the June choice to fund via the bills in coming months. 17/

@PauloMacro - Paulo Macro

Of course, this only shortens UST duration and pays the highest funding cost, exacerbating the fiscal stress that will ultimately feed back into a higher required TGA in the future, but that’s the next guy’s problem, isn’t it… /Fin