The Month-to-Month Republic
The Month-to-Month Republic
A billion dollars a year, give or take. That is what Washington saves if Citi has Wednesday right and the Treasury trims $3 billion from every 20-year and 30-year auction, then fills the hole with bills. Twelve months, two tenors, $72 billion of long paper that never gets sold, replaced by money that costs roughly 4 percent instead of 5.3. Against an interest bill near a trillion dollars, the saving rounds to a rumor. Refundings get rewritten for the optics.
The optics are a ten-year that touched 5.365 percent on October 7 and a thirty-year that still printed above 5.30 on Friday. Treasury has already tripled its long-sector buybacks to $6 billion an operation. It has already asked primary dealers, in the polite dialect of a questionnaire, about structural changes in investor demand. Nobody asks that when the answer is none. The dealers cannot agree on what follows. Citi wants the cut now and floats cancelling the 20-year outright. Barclays would soften the guidance to "the coming quarters." JPMorgan sees sizes frozen through next August, UBS says May, TD says February at the earliest. Five banks, five calendars, one shared assumption: the Treasury gets to decide.
Scott Bessent spent 2023 and 2024 faulting Janet Yellen for leaning on bills. He is now preparing to lean on bills. The critique was fair then and stays fair whoever holds the pen. Borrowing short to flatter long yields is an easing delivered through the issuance calendar, and the debt does not care who signed the memo.
Now the exposure. Bills are about 22 percent of debt outstanding, above the 20 percent Treasury's own advisory committee once floated as a long-run average. Last week Treasury sold a record $839 billion of them, and weekly bill auctions routinely clear half a trillion dollars. A country that rolls that much every week is in the renewals business. Meanwhile the Fed sits at 3.75 to 4 percent after a 10-2 hold with two dissents for a hike, September PCE ran at 3.6 percent, and Friday's close had a December increase priced near 74 percent. Call the bill stack $6.5 to $7 trillion. Every quarter point reprices all of it inside a year, which on my envelope costs somewhere near $16 billion. Treasury buys a billion dollars of relief and sells the Fed a $16 billion option. Long bonds are the lease. Bills are month-to-month. Month-to-month is cheaper right up until the landlord remembers he owns the building.
Timing makes it stranger. Through most of this year oil and Treasury yields moved in lockstep, a link BlackRock's Jeffrey Rosenberg says snapped in October. Brent gained 13.6 percent for the month while the ten-year handed back more than forty basis points from that October 7 high. The bond market quit pricing the Iran war as inflation and started pricing the AI unwind as a hedge. Friday made the case: Nasdaq down 2.9 percent, the chip index down 7.2, Intel suffering its worst day in more than four decades, and the ten-year yield still fell, to 4.93. So the long end finally behaves, and Treasury picks this week to start removing supply from it. The new plan leans on a correlation four weeks old. This morning Brent slid 3 percent to about $110 on Qatar-hosted talks in which Iran says Hormuz could reopen within two days if Washington meets its conditions, with Washington absent from the room. December Brent expired Friday at $117.64, 71 cents under the war-time closing high. If diplomacy stalls after Tuesday's vote, oil and yields can remarry, and a bill-heavy Treasury will meet a hiking Fed in the same lobby.
Then there is the tenant moving into the vacated floor. Citi's rates team argues that AI issuers are cannibalizing the long end, with pension money that once bought thirty-year Treasuries now buying thirty-year hyperscaler paper. The BIS put hyperscaler bonds of ten years or longer at about 24 percent of corporate issuance at those maturities this year. Alphabet's long-term debt went from $46.5 billion to $125.1 billion in nine months, Amazon's from $65.6 billion to $173.1 billion. By one tally the five biggest spenders put $556.9 billion into capex against $542.9 billion of operating cash flow, the first inversion since the series began in 2011. Duration stays in the economy, changes issuer and gets more expensive. Washington keeps its name on the long end and sublets the floor to the most cash-hungry borrowers in the market. The stablecoin issuers, bill buyers of a thousand pitch decks, spent last week freezing wallets after the $6.3 billion Binance theft, a fine use of a balance sheet, though not the one Treasury pencilled in.
At 3 p.m. Eastern today Treasury publishes its borrowing estimate. August's figure for this quarter was $628 billion, and any upward revision matters, since every extra dollar lands in bills. Wednesday at 8:30 the statement keeps or drops "at least the next several quarters." Then $125 billion of three-, ten- and thirty-year paper goes out on the 9th, 10th and 12th at whatever size, to buyers who have never had so many alternatives. Month-to-month is a wonderful arrangement until the first morning the landlord checks the comps.
Numbers as of Monday morning, so before the 3 p.m. borrowing estimate, ISM and Apple's print.