Wall Street’s ravenous appetite for government bills is about to be tested once again, as the Treasury is likely to further ramp up the size of oncoming auctions to rebuild its decimated cash buffer.
In the wake of Washington’s agreement last month to suspend the debt limit until 2025, Treasury has issued roughly $814 billion in securities on net in order to juice its cash balance. So far, investors have easily digested the first wave of supply, with money-market mutual funds absorbing roughly two thirds of the issuance by yanking $400 billion from the Federal Reserve’s overnight reverse repurchase agreement facility.
Combined with the record amount sitting on primary dealers’ balance sheets, it’s allowed Treasury to sell so much paper without distorting the very front end of the curve.
Yet the cash balance is still below levels that are considered to be normal for this time of year, according to Wrightson ICAP. That’s why the firm sees the Treasury announcing an ad-hoc cash management bill as early as this week to kick off another round of increases — followed by boosts to benchmark issues in the next two weeks.
The Treasury General Account “is still running below seasonal norms due to the debt ceiling constraints in the spring,” Wrightson ICAP economist Lou Crandall wrote in a note to clients.
Crandall said without the CMB, Treasury’s cash balance could drop back to the middle of the $400 billion to $500 billion range on Aug. 1 and remain in that ballpark for much of the month. By comparison, the Treasury said in a June statement it expected the TGA to decline in August before reaching its end-September estimate of $600 billion.
Wall Street strategists have cautioned that the influx of bill supply ultimately depends on whether market participants can digest the last few hundred billion dollars of the estimated $1.3 trillion of supply without it clogging up dealer balance sheets. Then there’s the uncertainty of the government’s funding landscape.
Bill share
The Treasury has telegraphed that it will increase the size of its coupon auctions at the upcoming quarterly refunding, but the next few meetings will be tougher to decipher due to various unknowns surrounding bill issuance, according to Citigroup Inc. strategist Jason Williams.
It largely hinges on how the department will target its desired share of T-bills as a percentage of outstanding debt — around 18% at the end of June — and just how quickly it aims to reach that level. Another factor is how much the government will need to raise in order to fund the Fed’s ongoing balance-sheet unwind, or quantitative tightening.
While Treasury has preferred to keep total issuance between 15% and 20% of total marketable debt, “there are strong arguments for Treasury to keep T-bill share near the top-end of the range and perhaps even exceed said range,” Williams wrote in a note, referring to recent demand for paper and elevated balances at the Fed’s RRP facility.
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