T-bill issuance is set to expand again this week, marking the first week in about a month in which the Treasury will not be adding cash to the overnight funding market through paydowns. This week, the Treasury will pay down approximately $16 billion in bills on January 13, followed by net new cash issuance of $23.4 billion in coupons and $4 billion in bills on January 15.

Net issuance should continue to increase beyond that point, and we will closely monitor whether overnight funding pressures re-emerge as the Treasury General Account rises, approaching month-end, and ahead of the quarterly refunding announcement.

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This week will also feature a CPI report. Based on market pricing as of Friday, CPI swap prices were implying a print above 2.9%, effectively rounding to 3%. That, of course, is subject to change as the week progresses.

The market was pricing the zero-coupon CPI swap index value at 324.9487, which would imply a 2.95% increase from the 315.61 level that printed in December 2024. While this is clearly subject to change, it is worth noting and something I will be watching closely as the week begins.

CPI had been trending higher heading into the government shutdown, reaching 2.9% in August and 3.0% in September, and the November reading did not seem entirely consistent with that trend. As a result, I would not be surprised to see CPI come in above the 2.7% level currently being priced in by analysts for December.

There were also notable surprises in the labor report, with the unemployment rate falling and wage growth accelerating.

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Speaking of the jobs report, which showed a solid improvement in the household survey in December, the 3-month Treasury bill 12-month forward minus the 3-month Treasury bill spread contracted to just -4 basis points. This is the highest level the spread has reached since early last year, which on the surface would suggest that the market is pricing in fewer rate cuts from the Fed in the future.

The obvious rebuttal is that Trump is likely to appoint a low-rate Fed chair. The obvious response to that, however, is that if you and I know it, then the market knows it as well.

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The ironic part of all this is that, even though everyone knows Trump is likely to appoint a Fed chair inclined toward cutting rates, both the December 2026 Fed funds futures contract and the 2-year Treasury yield are once again on the verge of breaking out of their proverbial trading ranges and moving sharply higher.

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USD/JPY weakened materially following the jobs report, but more importantly, the move came after Japan’s prime minister may consider calling a snap election. This once again highlights why the yen remains weak despite the narrowing of interest rate differentials. Rising rates in Japan are not only a reflection of inflation and Bank of Japan policy risk, but also fiscal policy risk—and for now, fiscal policy risk is winning.

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What is even more unusual is how low the 1-month implied correlation index already is, especially given how early we are in earnings season. The index fell below 7, placing it at the very low end of its historical range. Unless 1-month implied correlations are going to head back to zero and break below the July 2024 lows, a significant move higher in the S&P 500 is likely to be difficult.

Implied correlation levels this low are more often associated with market peaks than with the start of sustained rallies. See July 2024, January 2025, and October 2025.

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