GM. This is Milk Road Macro, the crypto newsletter that’s been to enough “bill parties” to know someone’s gonna have to pick up the tab eventually.

Here’s what we got for you today:

• ✍️ What happened with the quarterly refunding announcement?

• 🎙️ The Milk Road Macro Show: Milk Road's Macro Framework: How The Big Picture Empowers Investors w/ John Gillen

• 🍪 Trump imposed an additional 25% tariff on India

SO, WHAT HAPPENED WITH THE QUARTERLY REFUNDING ANNOUNCEMENT?

A big story over recent years is how the US Treasury has been conducting what some people have called “Treasury QE” or “stealth QE”.

The Treasury can achieve stimulative effects for the economy and markets by carefully crafting its debt issuance.

And last week, we got the latest guidance on how the Treasury will put together its debt issuance strategy in the Quarterly Refunding Announcement (QRA).

The QRA is honestly a bit of a snoozefest - and it’s really quite a nerdy topic.

But the decisions taken in the QRA can have a very big impact on asset markets.

So let’s attempt to run through what is happening as simply as possible…

First, a very quick history of “Yellen-omics”

The US Government currently has more than $28 trillion of total marketable debt, and that number is growing rapidly.

This means the US Treasury has no choice but to constantly issue mountains of new debt every quarter to refinance the existing debt.

But the Treasury does have control of what type of debt it issues.

• Bills are Treasuries with a maturity of one year or less (short-term).

• Coupons are Treasuries with a maturity of more than one year (longer-term).

The Treasury can “shift the mix” of its overall debt by deciding to issue more or less coupons (and this can have a big impact on markets).

In recent years, previous Treasury Secretary Janet Yellen decided to shift the mix heavily towards bills.

This means issuing less coupons, and more bills.

This type of heavy bill issuance is generally thought of as stimulative to the economy and asset markets (I’ll explain why in a bit).

Janet Yellen staged a “bill party”, and risk asset markets like stocks and bitcoin loved it.

However, it’s not a long-term solution to debt financing, because bills are very short-term, so they introduce roll-over risk and potentially greater volatility in interest expenses.

It can be risky - the fiscal equivalent of taking out payday loans.

In fact, it’s a tactic that has historically been used by emerging market economies with big debt problems, not something you would expect to see from the United States.

So, why can heavy bill financing be thought of as stimulative?

Relying heavily on “bill financing” is thought of as a textbook “debasement” tactic.

Bills are functionally cash that pays interest.

They are short-term, low-risk and incredibly liquid.

There is a very high demand for bills across almost every investor category - while there is much less demand for more risky and volatile coupons.

Institutional investors and banks gobble up bills and use them as collateral to expand lending and leverage, so increasing the amount of bills effectively floods the economy with more money.

In essence, heavy bill issuance acts like a covert form of “debt monetization” (or “money printing”). 

While the central bank isn’t directly printing money, the private sector’s increased appetite for bills can lead to a rapid expansion of credit, in some ways mirroring the effects of Quantitative Easing (QE). 

Also, when the Government issues more bills and fewer coupons, this is artificially tightening the supply of coupons, putting downward pressure on longer-term yields.

This can be thought of as a form of light Yield Curve Control (putting a ceiling on yields), which can also be stimulative to asset markets.

Yellen’s heavy reliance on bills was widely criticized as “stealth Quantitative Easing”, “Activist Treasury Issuance” and “Yellen-omics”.

Current Treasury Secretary Scott Bessent previously hammered Yellen for her controversial debt issuance switch, directly accusing her of “stimulating markets” in the run-up to the 2024 election.

So, what happened at the latest QRA?

Bessent was highly critical of Yellen from the outside, arguing she should have been more prudent and “termed out the debt” (moved back towards more coupon issuance and less bill issuance).

But once he sat in the chair himself, he realized that he couldn’t “term out the debt” - at least not yet.

There’s just not that kind of demand for coupons right now…

And last month, Bessent confirmed as much, saying that yields on longer-dated Treasuries were too high to consider boosting sales of such debt.

And so, here’s the key line from the recent QRA:

“Based on current projected borrowing needs, Treasury anticipates maintaining nominal coupon and FRN auction sizes for at least the next several quarters.”

This means that auctions of coupons will stay the same size, and the remaining (growing) financing needs of the US Government will be filled with bill issuance.

So, that means a lot of bill issuance is coming.

The Treasury will continue to rely heavily on bills to fund the gaping federal deficit until at least 2026, according to this latest guidance.

There had been some speculation that Bessent may have leaned even more towards bill financing in this latest QRA.

A few weeks ago, President Trump said he had instructed the Treasury not to issue debt with a maturity above 9 months (only issue bills). 

This was an extremely drastic proposition - and this didn’t happen.

Essentially, things are just being kept constant.

But “keeping things constant” still means that bills as a percentage of total debt (blue line in the chart below) is set to increase.

Wrapping up

At some point, the Treasury will have to start being sensible and “terming out the debt” (issuing more coupons and less bills).

But for now, nobody wants to take the plunge (there is low appetite for coupons, and longer-term Treasury yields just keep on edging higher).

So highly liquid bills are being used to fill in the US Government’s growing borrowing needs.

This can be thought of as stimulative to the economy and to asset markets, all else being equal.

But it isn’t a long-term solution to debt financing.

For now, Janet Yellen’s “bill party” continues and the music stays on.

But it’s getting late. Everybody is a bit drunk. And they will all have to go home at some point.

That’s it for this edition - catch you in the next one.

MACRO TRUTH BOMBS 💣

We just dropped a killer episode with John Gillen, and it’s packed with big-picture insights that make the latest QRA drama look like a symptom, not the cause. He covered:

• The 3-pillar macro framework that cuts through the noise

• Why debt is now the money... and inflation is built-in

• How liquidity drives boom/bust cycles (including crypto)

• What to own in the late-summer stage of the market

It’s a banger of an episode, don’t miss it 👇

YouTube | Spotify | Apple Podcasts

BITE-SIZED COOKIES FOR THE ROAD 🍪

New sweeping “reciprocal” tariffs are now in effect for dozens of countries. Some countries face a new rate of 15%, while others face “bespoke” rates set out by President Trump.

Meanwhile, Trump also imposed an additional 25% on India over its purchases of Russian oil. He also said he would soon announce new tariffs of 100% on imports of chips and semiconductors (but would exempt firms moving production back to the US), and tariffs of up to 250% on pharmaceuticals.

Fed Governor Adriana Kugler said she plans to step down from her role, and Trump revealed he would nominate a replacement in the coming days. This replacement is likely to be “temporary”, according to Trump, and won’t be his choice to replace Jerome Powell as Chairman.

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