One of the triggers in the rout on bonds in Sept/Oct of last year was rising US Treasury borrowing.
However better growth and borrowing that was more-weighted towards short-duration turned the tide in all markets in late October. Since then, falling yields have helped the Treasury towards sustainability and stronger growth has improved tax receipts.
With that, the Treasury announced today that it plans to borrow $760 billion this quarter, down from its $816 billion estimate in October. That’s a significant difference and comes due to higher cash balances at the end of Q1 and estimates for higher tax receipts. On Wednesday we will find out on which duration the Treasury will borrow but the picture is much improved compared to a few months ago and any longer-term borrowing should be absorbed.
That’s why US yields have fallen 2-3 bps since the announcement. In turn, that’s narrowed USD borrowing differentials and weighed ont he US dollar broadly. EUR/USD is up 10 pips on the announcement and there are similar moves elsewhere.
You would think that less debt and lower yields would be positive for a currency but it’s the opposite (at least to a point).