The bond market has followed through with an expected surge of Treasury bill, or T-bill, auctions that will continue through the summer as the U.S. Treasury refills its Treasury general account, or TGA, according to market sources. Net new T-bill issuance in June 2023 increased to $420 billion from $25 billion of net new T-bill issuance in June 2022, according to Scott Skrym at Curvature Securities.
The projected supply for July 2023 is $307 billion, up from a net paydown of $28 billion from maturities in July 2022, he added. Below is a chart
showing the ending balance as of Friday, July 7:
The flood of T-bills could push rates up higher as other borrowers offer higher rates to compete with the swell in supply, as reported
. So far, though, a slow drain in the reverse repo market has helped meet supply with demand, said market sources. Reverse repo transaction volume fell below $2 trillion on June 22, 2023, for the first time since June 3, 2022. The decline in reverse repo operations stems from money market funds reallocating deposits away from the reverse repo purchases with the Federal Reserve and into the T-bill market, said the market sources.
“Money market funds that were taking their overnight cash to the Fed in reverse repo purchases are giving the Fed less cash now implies money market funds are buying a lot of the T-bills issued in the last month,” said Skyrm. “Going forward, there’s no reason to think that anything will change in the next month.”
Money market funds were investing in securities with seven-day maturities but are now buying more one-month and three-month T-bills, which has helped match supply with demand, said market sources. However, the U.S. government is still operating with a deficit of roughly $1 trillion, so the market expects T-bill supply to persist to the end of the year, said the market sources. At that pace, money market funds could continue to drain away their repo transactions to purchase more supply, but this will have an impact on the Federal Reserve, too, as it watches its deposits slowly drain away.
“It will be interesting in a couple of years when reverse repo transactions drain to zero,” said Skyrm. “When there are no deposits and Treasury issues more debt, those purchases will be paid for out of cash, liquidity or bank reserves.”
--Seth Brumby, Marvis Gutierrez