Now that the treasury has not increased
issuance at this August refunding, they will clearly not have enough cash on hand into
the debt ceiling so again they will have to draw from their cash reserves at
the Fed and increase cash management bills.
In the last episode in March the treasury drew on
400bn of its reserves at he Fed!
In a similar fashion I believe the Treasury
reserves at the Fed will drop to 0 into October from 190bn today.
Link between treasury reserves at the Fed and JPY cross currency basis inverted
(Could have picked any ccy basis but JPY tend to be a reserve currency proxy)
This will flood the market with $
liquidity which again will make all cross currency basis correct from negative
levels to less negative levels.
This means $ unlikely to strengthen too much despite getting in the cheap zone, other factors like politics, balance of payments, carry will continue to drive valuations unless there is a crisis and flight to quality.
Impact on 10y yield is not fully
straightforward but usually treasuries rally as the Treasury rebuilds its cash
balances by buying treasuries they put at the fed in reserves. The opposite is also true, treasuries sell off as the Treasury sells its reserves to meet its cash
needs.
Continue to play long CAD-Short US 10y yields into August refunding as a macro RV trade.
I say impact on 10y is bearish at the
margin because many other factors affect 10y yields than just the Treasury cash reserve management (Note that the Treasury only has 190bn this time around compared to 500Bn in March).
For example, seasonality and carry are very supportive during the month of August and August tend to be prone to more liquidity crisis due to the holidays creating a flight to quality.
Strong NFP gives an opportunity for small short into next week supply (just few days to set up), but cover post refunding into end of August index extensions which should be greater than 0.1.