By Vivien Lou Chen
Primary dealers suggest ‘there is ample demand to absorb the increase in bill supply with only modest volatility in money market rates,’ according to minutes of the Treasury Borrowing Advisory Committee’s meeting
Bond-market traders took the Treasury Department’s as-expected quarterly refunding announcement in stride on Wednesday, putting aside concerns over whether a likely deluge of short-term debt in the months ahead might meet resistance from potential buyers.
Read: Treasury says it won’t have to increase coupon auction sizes for ‘next several quarters’
Helping to soothe these concerns were details in the department’s announcement that it anticipates marginal increases in T-bill auction sizes in coming days and expects to keep sizes at or near those levels through the end of September. Treasury yields were little changed to higher on Wednesday following better-than-expected data on second-quarter gross domestic product and from ADP’s private-sector jobs report, with traders seemingly less concerned about the government’s financing needs for now. Meanwhile, stocks DJIA SPX COMP headed mostly higher as afternoon trading kicked off.
The tax and spending bill signed into law by President Donald Trump on July 4 increased the U.S. debt ceiling by $5 trillion, paving the way for the Treasury to issue a flood of T-bills in coming months.
Some market participants have been concerned that an overreliance on short-term funding, like T-bills, might expose the government to volatile or higher financing costs if things go awry in the economy. Theoretically, this could occur via a recession, which might prompt investors to draw from their savings and could reduce their demand for T-bills, or due to a pickup in inflation that prompts the Federal Reserve to consider hiking interest rates and lifts T-bill rates.
The Treasury’s quarterly refunding announcement on Wednesday did not include a total amount for planned bill issuance during the current quarter. However, minutes from this week’s meeting of the Treasury Borrowing Advisory Committee, also released on Wednesday, offered some clues. The committee acts as an adviser to the Treasury on debt-management issues.
According to the minutes, the median estimate of primary dealers is that the Treasury could increase bill supply by $600 billion over a quarter without causing significant price deviations in bills relative to fair value. That’s toward the bottom range of what some economists had expected would be needed.
See also: Wall Street braces for deluge of Treasury bills, a crucial test of market demand
In addition, primary dealers signaled that “there is ample demand to absorb the increase in bill supply with only modest volatility in money market rates, so long as Treasury proceeds at a gradual pace and concentrates supply in short-dated bills,” according to the minutes from TBAC’s meeting on Tuesday.
Derek Tang, an economist at Monetary Policy Analytics in Washington, D.C., said via phone on Wednesday that “the refunding announcement has to respond to actual financing needs, and the needs on the ground are to replenish the Treasury General Account in the short term and finance the deficit in the longer term. There is not a lot of wiggle room.”
The important question in the months to come will be what the Treasury Department will do if market participants react badly to more supply, Tang said. “Because the increase in issuance is anticipated and hasn’t happened yet, it’s hard to know what the market is going to do when the time comes,” he added. “When we get into the fourth quarter and next year, we might run into capacity issues. Money-market funds may not have the appetite or capacity to extend duration or take on more bill supply.”
-Vivien Lou Chen
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