Huge Treasury Supply Next Week, But Federal Revenues Are Strengthening

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Here are 5 of the 10 key bullet points in this report.

  • Net new Treasury supply for the July 31 settlement will be the heaviest it has been since July 15, 2011. The TBAC severely underestimated new supply possibly due to a spreadsheet error. Last year there were no market dislocations that week due to the heavy supply.
  • The 10 year Treasury Yield is at a major inflection point as it retests the lows. This should be a 6 month cycle low, but a lower low is still possible.
  • Withholding tax collections remain have accelerated over the last two weeks, rising from around 2% to around 3.5%, suggesting that economic data may come in significantly better than consensus expectations for weakening growth. That could be the Treasury bubble’s death star. However, the vicissitudes of seasonal adjustments could delay recognition of the gains.
  • The Treasury’s cash balance is up slightly from last year at this time on a monthly moving average basis. Outlays are running slightly below last year but are likely to increase toward the end of the month, given the revenue increase, and political reality. No surprises are likely in Treasury supply.
  • The Fed announced at the beginning of July that it will retire $20 billion of its short term Treasury holdings. The Treasury must pay that off. So far, it has done it out of increased tax revenue and by increasing the 4 week bill auction sizes. Revenue gains are helping. Nobody has even noticed, the panic bid for short term paper remains so strong.

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