Feb 3 & Feb 4, 2021 (Pre NY Open): What Will Long-Term Rates Do If The Treasury Cuts Debt Issuance? 10yr Yield Is Likely To Rise, Not Fall -- Here Is Why

Summary

• We expect yields to be generally on the rise for another week or so -- equities should rise alongside. We have reset our long equity scalpers in RTY and ES.
• The liquidity models overrode the EWP technical wave action analysis -- looking for fundamental equity support from rising Treasury Cash Balance, Bank Reserves, and SOMA Transactions near-term.
• Short-tern outlook of rising yields get support from rising bond term premia and breakevens but the onset of seasonal liquidity drought which lasts till late March is just days away.
• If Debt Issuance (Total Debt) falls, Treasury Cash Balance also falls in nominal amounts. It does not mean that Bank Reserves will rise in terms of nominal amount -- it will only rise percentage-wise or ratio-wise to TCB. Bank Reserves and TCB have Yin-Yang relationship, but they are not directly inverse. Bank Reserves will fall too in nominal amounts. BR is not created ab nihilo -- it comes as a consequence of debt issuance and Fed monetizing that debt. If you lessen issuance, then nominally Bank Reserves will fall too. Its only the RATIO or PERCENTAGE of BR over TCB which will rise.
• The Debt Issuance and long term yield covariance flipped in 2003. Prior to September 2003, the correlation between yields and debt issuance was somewhat positive -- that flipped on Sept 2003. From that point on, the covariance between issuance and long term rates became negative. That negative covariance was further enhanced by the QE effect of dampened rates on more money from Treasury and Fed liquidity. We should see long term rates RISING with LESS issuance. The liquidity transmission is through the Treasury Cash Balance, but TCB impact on yields lags behind by one quarter, so often hard to discern.

Robert P. Balan runs Predictive Analytic Models, #1-rated trading unit at Seeking Alpha. PAM trades Swiss HF funds using Federal Reserve, US Treasury, and term (money) market liquidity data flows as basis for trading decisions. He is domiciled in Zurich, Switzerland.

Robert Balan has 5 decades of experience in the financial markets. Education in Mining Engineering, Computer Science & Engineering, M.S in Quantitative Finance, and training in Economics led to a commodity analysis career during the commodity boom of the early 1970s. Robert made a switch to global macro focus in the early 1980 when the commodity bull market waned, with specialization in foreign exchange. Robert wrote a very high profile daily FX analysis while Geneva-based (Lloyds Bank Int'l) in the mid-1980s (the first FX commentary with a real global readership, "most accessed" in the Reuters and Telerate networks from 1988 to 1994).

He worked for Swiss Bank Corp and Union Bank of Switzerland (precursors of today's new UBS) as head of technical research in various finance centers (London, New York, and subsequently, head of prop trading at SBC in Toronto ) from the late 1980s to mid-1990s. A stint at Bank of America as head of global technical research followed in late 1990s to the early 2000s. 

Robert returned to Switzerland in 2004 as head of technical research and strategy, and FX market analyst for Swiss Life Asset Management in Zurich. Robert wrote FX analysis and capital markets commentary for Saxo Bank (Denmark) in the early 2000s. He joined Diapason Commodities Management (CH) in Lausanne in 2008 as senior market strategist, and subsequently Chief Market Strategist, utilizing fundamental macroeconomic drivers and structural/technical data in modeling asset price and sector movements. 

Robert wrote a book on the Elliott Wave Principle in 1988, which has been hailed by the London Society of Technical Analysts as best ever book written on the subject. Robert is a member of the National Association for Business Economics (NABE), U.S.A.