Jun 5, 2023 - Economy

Bond market preps for T-bill deluge after debt ceiling deal

Illustration of a man balancing on the edge of a hundred dollar bill

Illustration: Sarah Grillo/Axios

With a debt ceiling deal signed, sealed and delivered, it’s time for Uncle Sam to refill its bank account.

Why it matters: It’s yet another example of the chaos caused by the monthslong impasse. The U.S. government's well-oiled borrowing machine, which screeched to a halt in January, is now playing catch up. And the incoming deluge could strain the system.

  • Whether it will morph from a mere challenge into a broader market disruption is a hotly debated topic right now — especially with the economy slowing and the banking sector still vulnerable amid its own simmering crisis.

The background: The Treasury General Account — effectively, the government’s checking account — was nearly drained over the last few months.

  • The government will likely need to issue as much as $1 trillion in Treasury bills over the next six months to return the balance to historical norms — plus continue funding day-t0-day needs.

The big picture: “Outside of a major crisis, like 2008 or 2020, this is going to be the largest issuance of T-bills on record,” says Gennadiy Goldberg, senior U.S. rates strategist at TD Securities.

  • "It's kind of like watching a person walk across a tightrope," says Jim Caron, co-CIO of Global Balanced Funds at Morgan Stanley Investment Management. The tightrope is not without risk, but the walker believes the risks are knowable and can be managed.
  • Chief among those risks: The new bills could siphon more money out of a banking system already damaged by mass outflows this year. That could send banks scrambling to raise more cash, pushing up their funding costs and further stressing the system, Goldberg says.

What they're saying: Some think the fears are overblown. Putting a half-trillion or more of bills into the system “might sound terrible, until you realize that there's an extra couple trillion sloshing around out there anyhow, that can't find a home, and that ends up in the Fed overnight,” says Robert Tipp, chief investment strategist at PGIM Fixed Income.

  • He’s referring to the over $2 trillion in money market assets currently parked at a Fed overnight facility that yields more than 5%.
  • Caron is inclined to agree: "There's an awful lot of money in the short-term markets and in cash, that's looking for an outlet, looking for a little bit more yield."
  • Treasury will have to pay up, of course, to entice that cash out of the Fed facility — and those higher yields will effectively tighten financial conditions.

Yes, but: Treasury’s just playing catch up — the lack of supply over the last several months probably kept yields lower than they would have otherwise been, Tipp notes.

Worth noting: Treasury’s known for months this would happen, and has been laying the groundwork.

  • In a May 3 release by the Treasury Borrowing Advisory Committee, the group of primary dealers estimated that the market could absorb at least $600 billion over the next three months — but encouraged Treasury to be responsive to signs of stress in the market.

The bottom line: "You never know how much of an impact something is going to have until it’s upon you," says Tipp.

  • "But I don't think this is going to be the blood sport that people are fearing."
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