NEW YORK (Reuters) – Investors are bracing for a flurry of U.S. government bond issuance as the Treasury plans to quickly fill its depleted coffers after the recent suspension of the debt ceiling.
The Treasury’s general account has fallen sharply since January, when the Treasury reached its borrowing limit. Cash balance goals indicate that he will need to replenish his account quickly now that the borrowing limit has been lifted.
Deutsche Bank strategist Steven Zeng said in a recent research note that he expects net issuance of $400 billion in June, followed by $500 billion between July and September. In total, Zeng estimated $1.3 trillion in net note issuance by the end of the year.
Expected sales of Treasuries could drain liquidity from financial markets, investors and analysts said.
“This influx of funds into Treasuries in the coming weeks could have the negative effect of reducing overall liquidity,” investment firm Glenmede said in a note, adding that historically stock markets have reacted unfavorably. weaker liquidity conditions resulting from debt ceiling agreements.
But the impact could be mitigated depending on the share of new issuance absorbed by money market funds that draw allocations away from the overnight repo facility (RRP), where market participants lend liquidity to the day to day at the Fed in exchange for Treasuries.
“Money market funds are extremely short … so trillion dollar treasury bills (issue) would be welcomed with open arms,” said money market fund expert Peter Crane, president of Crane Data. This could be partly because money market funds, heavily exposed to short-term debt this year, have recently started extending their maturities.
“The Federal Reserve’s RRP holds trillions in money fund assets and so the money can easily be redeployed into Treasuries. Whether they like it or not is a matter of yield…the Treasury may have to pay above the RRP and pay up,” he said.
The Treasury on Monday attracted strong demand for a $50 billion sale of 44-day cash-management bills, with demand at 3.19 times the amount of debt on offer.
This was added to the auctions of three- and six-month bills regularly scheduled by the Treasury.
One risk is that expectations of further interest rate hikes by the Federal Reserve could dampen demand, Deutsche Bank’s Zeng said.
“Elevated risks of a more aggressive than expected Fed hike path would make Treasuries a less attractive investment relative to the ON RRP and could lead to lower than expected demand for money market funds for Treasuries. expected,” he said.
(Reporting by Davide Barbuscia and Karen Brettel in New York; Editing by Alden Bentley and Matthew Lewis)