Citi's Hollenhorst on T-Bills, Ceiling
Citi Research money market strategist Andrew Hollenhorst writes "Too Much Cash, Too Few T-Bills" in his latest "Short-End Notes." It says, "Following the Fed's decision not to raise rates last week, cash has poured back into US T-bills and the front-end of the curve, with yields 1bp or below out to March of 2016. In other words, interest rate derivatives curves are upward sloping to reflect the possibility of Fed hikes but pricing in the T-bill market is dominated by technical supply/demand factors. We expect the demand pressure and lack of supply to intensify over the next two months, keeping bill yields low. The next buying opportunity will likely not emerge until December. The Fed not hiking has increased front-end demand for at least three reasons: 1. Lower probability of rate hike.... 2. Less duration risk aversion [and] 3. Less need for foreign central banks to sell USD reserves." It continues, "The effect of the increased demand has been exacerbated by expectations of a projected $135 billion drop in T-bill supply over the next two months.... It remains Treasury's goal to keep its cash balance above $150bln. This is meant to provide enough "money in the bank" to cover government payment obligations if Treasury were unable to issue (for instance in the event of a natural disaster). Debt ceiling considerations have complicated these plans. Treasury is now cutting T-bill issuance to make room under the ceiling for upcoming planned coupon issuance. Also, Treasury's cash balance recently dipped below $100 billion and is likely to decline again as we approach the "hard" ceiling date. Cumulatively, we expect Treasury reduce bills outstanding by $135 billion ahead of the "hard" ceiling later this year. Our point estimate for the "hard" debt ceiling remains December 1st when Treasury will need to make significant recurring payments. However we note that government day-to-day cash needs are volatile and Treasury will likely push for Congress to raise or (more likely) suspend the debt ceiling ahead of this date. A new debt ceiling suspension may or may not be tied to a possible government shutdown which will occur on October 1st if Congress fails to approve a short-term spending plan or continuing resolution (CR).... The confluence of a drop in supply and increased demand led one month bills to trade at negative yields this week.... T-bills are likely to stay rich until a resolution of the debt ceiling which would allow Treasury to increase the supply of bills. This, together with constrained dealer balance sheet may create the next buying opportunity for bills in December."
