Abate on T-Bill Issuance
Barclays' money market strategist Joseph Abate latest "US Weekly Money Market Update" says, "In the Quarterly Refunding Announcement, the Treasury announced plans to increase its minimum daily cash balance to $150bn. This is about $100bn larger than last year's average balance and the average balance during 2009-2014. The Treasury plans to finance this extra cash cushion with increased bill issuance. Accompanying the announcement, the TBAC recommended the Treasury consider (re)introducing a 2m bill maturity -- at a weekly frequency. Front-end investors like the idea of a 2m bill. But, it is unclear if the 2m maturity is what short-term investors find most attractive -- or just the prospect of more supply in any bill maturity." Abate continues, "Demand for a 2m bill could be quite strong from money funds that have been scrambling to find sufficient supply amid dealer repo balance sheet reduction and declining bill issuance. Much of the focus of this potential demand has been on prime institutional funds with plans to limit the maximum maturity of their holdings to 60d, thereby preserving their ability to use historical accounting. But our sense is that demand might be stronger from government-only money funds as they have few investment alternatives and, given upcoming money fund reform, their balances could surge in the next 18m. One issue we expect the Treasury to wrestle with in the coming months as it considers a 2m bill tenor is the extent to which a new bill could crowd out demand for its 2y FRN.... Money fund demand for 2y FRNs has been weaker than expected at the launch of the program in January 2014. As of April, money funds held $52bn of these issues or 23.5% of the outstanding amount. Although we suspect that a 2m bill would have an even lower yield than the 2y FRN, government-only money funds may prefer the bill as it would consume less WAL.... While we expect the Treasury to auction 2m bills, we do not expect it will reach a decision this year. Instead, it will probably modestly increase auction sizes -- across all the weekly tenors -- to raise the extra cash needed for its daily buffer (assuming this average buffer is $150bn)."
