Gwen John
Liquidity Tightening Ahead: Treasury Supply Spike Puts Markets on Watch
Liquidity drains will continue this week as the Treasury settles another $62 billion in T-bills. This will continue on February 17, when it settles around $35 billion in coupons, requiring approximately $90 billion to be raised this week for settlement. The bill timetable for the week of February 17 may add an additional $60 billion to that amount. This means that in the next two weeks, we could see $150 billion in settlements. At the present, it appears that no money is coming from "cash on the sidelines" to fund the debt.
Anyway, the point is that the cash is coming from someplace; some of it looks to be showing up on dealers' balance sheets, which may be significant if it affects liquidity in other areas of the market, like leverage. Given the stock market's performance and the position of reserve balances, margin levels most likely fell in January. I would be surprised if they increased in any significant way. We are only concerned about this because of the influence it has had on our own market, notably the direction of the 5-year cross-currency basis swap and the SPY. That pattern has continued for nearly four years. According to this chart, dollar funding circumstances are currently favorable, which is likely one of the reasons why assets like as Bitcoin and some sectors of the equity market have suffered while the larger index has held together. If demand for US dollar hedges fluctuates, so will the flow of liquidity.
Why This News Matters
A lot of Treasury bonds will be issued over the next two weeks, which will take money out of the financial system and make it harder to get cash. When liquidity gets tighter, risky assets like crypto and some parts of the stock market often have a hard time, even if the major indexes stay the same. At the same time, currency tensions, like a weakening yen and the possibility of intervention, make the global market even more risky.
Japan Election, Fiscal Policy and USD/JPY Outlook
The LDP earned a landslide victory in Japan's weekend election, allowing Prime Minister Sanae Takaichi to "run it hot" on the economy. USD/JPY was already trading just below 158, and the win suggests it will fall further. At this moment, the BOJ is dragging its feet, and the government is implementing extremely lax fiscal policy, so it makes perfect sense for the USD/JPY to climb higher, and the prospect of intervention appears out of place, in my opinion. But it's evident they're concerned about the 160 level.
A weekly technical chart of the USD/JPY demonstrates why. After 160, the next level of resistance is roughly 164, and that's it, because it appears that 220 comes next. It obviously sounds ridiculous, but talking about the 10-year JGB trading above 2% sounded strange a year ago as well. Of course, the gap between the JPY and the interest rate differential is under greater strain given how far they have already separated. At this point, only a strengthening yen, dropping Japanese rates, or rising US rates will reverse this trend. I'm not sure which one happens.
Takaichi is expected to win up to 328 of the 465 seats in Parliament's lower chamber for her Liberal Democratic Party. Takaichi and her coalition partner, the Japan Innovation Party (Ishin), now have a supermajority of two-thirds of seats, allowing her to override the upper chamber, which she does not control. "The Liberal Democratic Party's landslide victory removes political uncertainty and strengthens policy execution, but shifts market focus squarely to how fiscal policy is designed and communicated," said Shoki Omori, chief desk strategist for rates and FX at Mizuho.
"Under a reinvigorated LDP mandate, fiscal policy is likely to turn more expansionary, with measures such as a consumption tax cut on food now more likely," said David Chao, global market strategist for Asia-Pacific at Invesco in Singapore.
Yen Intervention Signals from Japanese Authorities
Japan's finance ministry increased yen warnings throughout the weekend and into Monday, signaling a willingness to interfere as officials emphasized coordination with the US and vigilance against disruptive FX movements. Finance Minister Satsuki Katayama said she was ready to interact with financial markets to calm emotions and cautioned that authorities were constantly monitoring currency movements and would not hesitate to intervene if volatility went too high.
Katayama emphasized that Japan and the United States operate under a memorandum of understanding that allows for decisive action, including currency intervention, in response to rapid exchange-rate changes that deviate from economic fundamentals. She stated that she continues in frequent contact with US Treasury Secretary Scott Bessent. Katayama also addressed speculation over Japan's enormous foreign exchange reserves, emphasizing the importance of a "professional" and market-sensitive strategy while reaffirming the government's commitment to budgetary sustainability.
That warning was echoed by Atsushi Mimura, Japan's assistant finance minister for international affairs and the country's senior currency diplomat, who stated that officials were closely monitoring foreign exchange events "with a high sense of urgency." As head of the finance ministry's international relations division, he is the individual who would instruct the Bank of Japan to conduct yen-buying operations if intervention is approved.
Currency and Global Market Moves
The yen rose in Asian trading on Monday after Japanese Prime Minister Sanae Takaichi won Sunday's election, breaking a six-day losing streak. The yen rose 0.4% to 156.52 per dollar, following previous weakness. The yen also retraced losses against other currencies after reaching its all-time low against the Swiss franc and close to its lowest level since the euro's inception. "While the initial yen weakness may not have played out, the outlook for the yen is still one which is likely to struggle to strengthen," according to Sim Moh Siong, an economist at OCBC. "At least in the near term, there's also concern about intervention risk, which may be capping the upside for dollar-yen."
The US dollar index fell 0.2% to 97.38 ahead of significant U.S. data releases such as retail sales, inflation, and a delayed jobs report. A Bloomberg report that China has asked banks to reduce Treasury holdings also impacted on the dollar. The dollar fell 0.1% against the offshore yuan, trading at 6.9259. Fed funds futures indicate a 17.9% chance of a 25-basis-point rate decrease at the Fed's March meeting. The pound remained unchanged at $1.3619 amid political developments in the United Kingdom. The Australian currency climbed 0.4% to $0.7039, the New Zealand dollar 0.1% to $0.6025, and the euro 0.3 percent to $1.1852. Bitcoin was down 0.2% at $70,537.09, and ether declined 0.8% to $2,076.37.
What to Watch Next
Liquidity conditions: If Treasury settlements start to put pressure on stocks, credit, or crypto. Dealer balance sheets and leverage: Signs of funding stress in the markets USD/JPY levels: If the dollar moves toward 160, Japan might step in. U.S. yields and dollar funding: Changes here will affect how much risk people around the world are willing to take.
