Once the U.S. debt-ceiling dispute is resolved, the Treasury will issue a massive supply of bills to replenish its coffers that were emptied due to the long-running standoff in Washington over the government’s borrowing limit. However, the question that arises is who will buy the bills and at what cost?
Treasury bills are government-issued debts that mature in between four and 52 weeks. According to estimates by BofA Global analysts, new bill issuance could amount to about $1.4 trillion till the end of 2023, with roughly $1 trillion arriving in the market before the end of August. The expected deluge through August could be almost five times the supply of the average three-month stretch recorded in the pre-pandemic years.
BofA Global’s rates strategist, Mark Cabana, said that they’re confident about the buyers but acknowledged that it won’t be at current levels. They expect things to get cheap before a buyer comes in. According to him, the key buyer will be money-market funds, with assets managed close to around $5.4 trillion since March, after Silicon Valley Bank’s collapse. People who withdrew billions of dollars from banks in March and parked them in money-market funds may end up playing an encore performance in this year’s debt-ceiling drama.
Money-market funds have become the reason why no less than $2 trillion generally sits overnight at the U.S. Federal Reserve’s reverse repo facility. Cabana said that new Treasury bills might need to exceed the facility’s interest rate by around 10-20 basis points.
While the bill issuance for sale is expected to be heavy and short-term, institutions auctions, foreign buyers, and money-market funds should continue to be buyers in the market, according to Head of Fixed Income Americas at DWS Group, George Catrambone. However, ultimately, the price is the question.
On Monday, President Joe Biden met with House Speaker Kevin McCarthy, R-Calif., to talk about raising the $31.4 trillion borrowing limit to avoid a “doomsday” scenario in financial markets if the U.S. defaults. Congress has always made deals each time the U.S. public debt has exceeded its debt ceiling in the past, including suspending it eight times since 2016.
Cash balances at the Treasury Department have plunged to under $100 billion since it hit its borrowing limit last January, according to economists at Jefferies. Its cash balance may drop below $50 billion between June 5 to 15, according to Barclays strategists. “Basically, we are just draining our cash account to fund operations while we wait to figure out the debt ceiling,” said Lindsay Rosner, senior portfolio manager at PGIM Fixed Income.
After the debt-ceiling fight concludes in a positive resolution, Lindsay Rosner expects longer-dated Treasury yields to surge while haven buying due to fears of a full U.S. government default and a credit rating downgrade will have been wiped off the table. That’s why Rosner has been avoiding ultra-short Treasurys in favor of 2-4 year bonds, which offer some of the highest yields since several years. “We’re being afforded good yield, good spread, a couple of years out the curve,” she said. “Play that game.”
