Net Dollar Liquidity: Understanding the Nuances and 2023 Outlook

Key Insights

• The composition is just as important as the size of U.S. Treasury issuance in determining its impact on market-wide risk premiums.
• Despite the ongoing Treasury General Account (TGA) drawdown, uncertainty around the debt ceiling and heavy pre-planned coupon (longer duration) issuance bodes poorly for risk assets.
• In the intermediate term, monetary authorities might use a form of "stealth QE" to counteract a rapid decline in bank reserves or market dysfunction, loosening financial conditions in the process.
• A hawkish Bank of Japan (BOJ) would mean a total absence of funding currencies and meaningful sell pressure in the U.S. Treasury market, a tail risk that could unhinge U.S. bond yields in near-term.

While the U.S. Dollar may not be the best money, 2022 has left little doubt that it’s still the most important money. With its role as the global reserve currency, dollars are instrumental in understanding asset prices. The global price of assets is driven by the availability of cash (money and credit) and the supply of assets. All else equal, less dollars means lower prices.