Equity futures reversed hard to the upside this morning and the long end of the bond market (TLT) also rallied. The reason is that the US Treasury issued their Quarterly Refunding Announcement (QRA). Like many observers of markets, had someone asked me what QRA stands for six months ago, I might have guessed it was a new advanced statistic relating to quarterback play. The QRA, released this morning, is when the Treasury tells the world how much issuance there will be and where it will take place along the curve. The QRA has become suddenly important because of the emerging concerns that there may be developing a supply/demand mismatch for longer duration Treasury issuance. Treasury has been reducing the duration of issuance for the last couple of years but surprised markets exactly one quarter ago when they announced that they would be growing issuance at the long end of the curve. Many fixed-income strategists and traders made the case at that time that the increased supply of long-end issuance would leave to a sell-off and they were proven correct.

By the same logic, today’s announcement appears to have surprised that same cohort of strategists and traders who were expecting Secretary Yellen to continue that trend of longer-dated issuance. Instead, it appears that the issuance will be more bill intensive where there is a relatively inexhaustible demand from money market funds and other sources.

A few weeks ago we framed the debate around what is the likely path for long rates. The bull case (lower yields) stands on the rock solid precedent that in the previous nine times when the Fed ended a tightening cycle, long bonds rallied. The bear case has been that this time is different in terms of continued consumer demand and inflation pressures, entrenched deficits that beget more supply across the curve, and finally the broader adoption of our core conviction that we face a future of secular inflation pressures. So at least in the short-term, one of those concerns, long duration supply, has been pushed out for at least three more months. The bottom-line is that markets appear to be set-up for a relief rally in both bonds and equities. 

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