Trading Day: Tech, tariffs & Treasuries

U.S. stocks and bond yields saw mixed movements on Monday as investors grappled with a series of economic announcements from Washington. The U.S. Treasury's intention to increase buybacks of long-dated bonds, the imposition of 'economic D-Day' sanctions aimed at isolating Iran, and the threat of new tariffs on Canada all contributed to market uncertainty.

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U.S. Treasury Secretary Scott Bessent seems to be stepping up the fight against the "bond vigilantes".

Investors are closely watching U.S. Treasury Secretary Scott Bessent, with mounting evidence suggesting he faces a credibility challenge. Recent surprise interventions in the foreign exchange and bond markets have unsettled investors. By Bessent's own stated objectives of reducing the deficit and lowering bond yields, his performance is falling short, raising questions about his strategy.

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Apart from emergencies, Treasury wants a chunky TGA balance.

One key development involves the Treasury's potential use of cash from the Treasury General Account (TGA) to fund the purchase of longer-dated bonds, a move reportedly considered by Bessent. This strategy, sometimes referred to as a 'Treasury Twist,' appeared to be initially welcomed by the market, as the 30-year yield fell. However, questions remain about the sustainability of this approach. The Treasury typically aims to maintain a substantial TGA balance for various needs, and increased reliance on short-term bills for funding raises rollover risk. Using short-term bills while simultaneously reducing cash reserves to mitigate this risk appears counter-intuitive and potentially precarious.

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Leaning more heavily on short-term bill issuance and simultaneously reducing cash on hand to mitigate rollover risk would seem to be a counter-intuitive and dicey proposition.