ORLANDO, Florida, Sept 8 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

World stocks rallied and gold leaped to new highs on Monday as

investors cemented bets that U.S. interest rates will be cut

next week, while political ructions in Argentina, Japan and

France raised uncertainty in these countries' markets.

The long end of sovereign bond markets has rightly grabbed

the headlines lately, with 30-year yields spiking to historic

highs in many countries. But in my column today I look at the

ultra-short end of the U.S. curve, where Treasury has reached a

$100 billion issuance milestone.

If you have more time to read, here are a few articles I

recommend to help you make sense of what happened in markets

today.

1. Dollar's haven status may have always been a

mirage:

Dolan

2. U.S. bond market may be too sanguine about

underlying

fiscal, inflation risks

3. Japan PM hopefuls prepare leadership bids,

markets

recoil

4. French parliament ousts prime minister, deepening

political crisis

5. Tesla market share in U.S. drops to lowest since

2017 as

competition heats up

Today's Key Market Moves

* STOCKS: Nasdaq hits record high, MSCI All Country

and

Japan's Nikkei a whisker from fresh peaks. Argentina's Merval

plunges 13%.

* SHARES/SECTORS: U.S. tech outperforms, consumer

discretionary also up. But most U.S. sectors fall, with

utilities and real estate both off 1%.

* FX: Argentina's peso tumbles 6% to a record low,

Japan's

yen slips 0.2%. But U.S. dollar weakens broadly, especially vs

kiwi dollar and Swissie in G10 space.

* BONDS: Yields slide again, U.S. curve bull

flattens. 30y

U.S. yield down 8 bps below 4.70%.

* COMMODITIES: Oil up 0.6-0.8% as OPEC+ opts for a

modest

output hike, gold up another 1.5% to new high of $3,646/oz.

Today's Talking Points:

* Fed 50?

Could the Fed cut rates by 50 basis points next week? It's

unlikely, but markets are beginning to price in the possibility.

Fed funds futures are now attaching around a 10% chance, and big

banks Standard Chartered and Societe Generale are calling for

it.

The argument is the labor market is even weaker than soft

headline numbers show. If benchmark preliminary revisions for

April 2024-March 2025 jobs data on Tuesday are big enough, the

case for 50 bps could mushroom.

* Pesky politics

From France to Japan, Argentina to Indonesia, political

upheaval around the world is swaying financial markets. Some of

Monday's moves were dramatic, especially in Argentina where the

peso slumped to an all-time low and stocks and bonds tanked

following a local election on Sunday.

Each country has its own issues, but there are common themes

- high inflation and cost of living, rising government debt and

deficits, economic uncertainty, populism, and distrust in

'elites'. Political volatility sometimes has next to no impact

on markets, sometimes it's huge.

* Going for gold

Gold's march higher shows little sign of slowing, never

mind reversing. It is up 10% in barely over two weeks and nearly

40% this year, hitting record highs on a near daily basis as

investors seek safety and an inflation hedge.

It's long-term investment allure isn't dimming either, even

at these record prices. Official figures from Beijing on Sunday

showed that China's central bank added gold to its reserves in

August for a 10th straight month.

The $100 billion Treasury record you probably missed

The recent spike in 30-year yields has been the headline

story in world bond markets, for good reason. But with so much

attention on the long end of the curve, few seem to have noticed

the historic developments in the ultra-short U.S. Treasury

market.

The weekly sales of four-week T-bills have now reached the

landmark threshold of $100 billion, with the September 4 auction

marking the fifth consecutive sale at that record-high amount.

This flood of bill sales reflects the government's new

strategy. President Donald Trump's administration is seeking to

reduce the country's debt maturity profile - and overall

interest costs - by borrowing more at the ultra-short end of the

curve, while simultaneously pushing the Federal Reserve to lower

rates.

So far, it seems to be working.

The Fed appears certain to resume its interest rate-cutting

cycle later this month, with investors anticipating at least 150

basis points of easing by the end of next year.

Not only is that bringing down bill rates and short-term

bond yields, it's also pulling down longer-term yields. The

benchmark 10-year yield is the lowest since April's 'Liberation

Day' tariff chaos, while the 30-year yield is again backing away

from 5%.

The upshot is that investors lending to Uncle Sam for 10

years, with all the risk that entails, are getting paid an

annual 4.08%, while investors lending to the U.S. government for

four weeks are getting 4.20%. Unsurprisingly, these bill

auctions have elicited strong demand: last week's $100 billion

sale was 2.78 times oversubscribed.

So what's the problem?

LET ME ROLL IT

The biggest concern is 'rollover' risk. Concentrating sales

at the front end of the curve means the government has to

refinance a large chunk of its debt much more frequently. This

leaves it vulnerable to unforeseen financial, political or

economic shocks that could cause short-term borrowing costs to

spike or force the Fed to suddenly raise its policy rate.

True, Fed expectations are skewed to the downside right now,

but what if inflation expectations become unanchored, and the

Fed has to pause its easing cycle or even consider raising

rates?

That's not an outlandish scenario. The Fed looks set to ease

in an environment with 3% inflation, record-high equity markets,

the loosest financial conditions in three-and-a-half years,

according to Goldman Sachs, and economic growth tracking at

3.5%, based on the Atlanta Fed's latest GDPNow model. And that's

not even taking into account the full inflationary impact of

Trump's tariffs.

Increased bill issuance has been well absorbed so far, but

cash going into bills is depleting liquidity pools and buffers

in other parts of the system. The Fed's overnight reverse repo

facility is almost empty, and total bank reserves at the Fed are

declining.

No one knows what the lowest comfortable level of reserves

for the banking system is. It proved to be around $1.5 trillion

in late 2019, when a sudden drop below that level triggered

significant money market volatility and a spike in overnight

rates.

Experts reckon it is higher today, as the economy and

banking system have expanded. But reserves are steadily

decreasing and look set to fall below $3 trillion. Analysts at

Citi warn they will "continue marching" below that level as

T-bill issuance grows, potentially putting upward pressure on

repo rates and funding costs.

THRESHOLD

With the Treasury leaning more on T-bills for funding, new

issuance over the next 18 months could perhaps exceed $1.5

trillion, according to some Wall Street bank estimates.

As a result, the share of bills in the total outstanding

federal debt stock is likely to grow too. This portion currently

stands at just under 21%, slightly below the historical average

of around 22.5% but above the 15-20% range recommended by the

Treasury Borrowing Advisory Committee.

Analysts at T Rowe Price reckon the share could soon reach

25%, a level last seen during the pandemic and the Global

Financial Crisis, suggesting borrowing policies previously seen

in crises could become the new normal.

Of course, none of this will be a problem if increased

issuance continues to be met with solid demand.

And there's reason to believe that will be the case. First,

money market funds - the biggest buyers of T-bills with holdings

representing 36% of the $6.4 trillion market - have seen their

assets explode from $4.7 trillion in early 2020 to more than $7

trillion today. And there is now also massive demand from

stablecoin issuers looking to back their crypto assets with

safe, liquid assets like T-bills.

In short, the market could continue to 'play ball' with the

government's new funding strategy. With over $1 trillion of new

issuance coming, the Trump administration certainly hopes

so.

What could move markets tomorrow?

* Australia consumer sentiment (September)

* Taiwan trade (August)

* Bank of France Governor Francois Villeroy speaks

* U.S. revisions to job growth in year through March

* U.S. Treasury auctions $58 bln of 3-year notes

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