The US Treasury’s move to ratchet up the size of its bill offerings is stoking concern that the deluge of supply will choke the market and threaten vital sources of funding.
Since the government suspended the debt ceiling at the beginning of June, the Treasury has issued roughly $852 billion of bills on net and plans to raise another net $53 billion next week. So far, investors have lapped up supply with ease. Yet signs are emerging that the market is starting to have some difficulty handling the flood of bills.
Primary dealer holdings of T-bills reached an all-time high of $116 billion in the week through July 12, according to New York Fed data. While levels have pulled back since then, the increased supply threatens to boost the pile of government bills on dealers’ balance sheets, limiting their ability to function in other markets such as corporate debt, a funding lifeline for businesses.
“I think we’re almost there on the indigestion front,” said Gennadiy Goldberg, head of US interest rates strategy at TD Securities. “Dealers are already quite full on bills and further issuance is not likely to slow too materially, which will keep up the pressure. The market is between a rock and a hard place, so it’s only a matter of time before the indigestion sets in.”
Treasury said Thursday it plans to sell $67 billion of three-month bills Monday, $2 billion more than the previous offering at that tenor. It lifted the size of its six-month operation to $60 billion from $58 billion, and the one-year sale to $40 billion from $38 billion. It also announced a $5 billion increase in the size of the 6-week auction to be sold on Tuesday, taking it to $55 billion.
It’s not just bills that are flooding the market. The Treasury has boosted the size of its quarterly bond sales for the first time in 2 1/2 years, an announcement that sent 10-year Treasury yields to the highest levels since November.
Overall, the Treasury increased its net borrowing estimate for the July-through-September quarter to $1 trillion, well up from the $733 billion amount it had predicted in early May. Part of the higher estimate is due to a bigger cash balance planned for the end of September. The cash balance was $458 billion as of Aug. 1, which is less than the Treasury’s revised forecast of $650 billion.
The Treasury Borrowing Advisory Committee, a group comprising dealers, investors and other stakeholders, acknowledged at its recent meeting that bill issuance has been absorbed well and money-market fund demand would provide “significant capacity” for additional bill issuance. It also told Secretary Janet Yellen it’s comfortable with T-bill supply taking a larger share of total outstanding debt before returning to the recommended 15% to 20% range, in order to maintain a regular and predictable approach to increasing coupon issuance.
That view is echoed by Jefferies economist Thomas Simons, who noted the amount of cash invested in money-market mutual funds continues to exceed the amount of bills outstanding by a substantial margin and there’s still $1.7 trillion to $1.8 trillion parked at the Federal Reserve’s overnight reverse repurchase agreement facility.
“I’m not super worried about bills running into liquidity problems,” he said. “There is plenty of capacity to increase bill issuance, irrespective of what share it represents of the total market for Treasuries.”
