JPM: Big Outflows Expected July 15
J.P. Morgan Securities writes in their latest "Short-Term Fixed Income" that "Tax day looms; MMF trend towards T-bills persists." They tell us, "Money market investors are anxiously preparing for [the] July 15 tax date. Beyond its impact of Treasury's General Account (TGA) at the Fed and the implications on net T-bill issuance, money market participants are wondering how much cash could be withdrawn from MMFs to fund the tax payments. Based on the pace observed in 2018 and 2019, our Treasury strategists estimate individual income taxes would amount to about $90bn while corporate taxes would amount to $60bn for a total of $150bn to be collected by Treasury.... As we noted in our mid-year outlook, it is typical for corporations to draw on their MMFs to fund their tax payments while it is less common for individuals.... This would suggest that we could see at least $50-60bn be withdrawn from institutional MMFs (most likely government institutional MMFs) to pay for corporate taxes, and more if individuals also decide to fund their tax payments with MMFs rather than bank deposits." The piece continues, "While $60bn only represents about 2% of government institutional MMFs' balances, nonetheless this implies less demand for repo and T-bills. Over the past two years, we have found that SOFR tends to move higher by ~5bp around tax days (excluding last September), though we suspect this should not be an issue this time around given the amount of liquidity in the system and the availability of TOMOs as a backstop. As for T-bills, while outflows will generate less demand for this product, we also anticipate net T-bill issuance to slow considerably this month. In fact, our Treasury strategists believe that net T-bill issuance will increase a modest $24bn in July (versus +$460bn in June, +$588bn in May, and +$1344bn in April) given Treasury's continued elevated TGA balances. Net, the reduction in demand is met with relatively muted net T-bill supply in the coming weeks which we believe will keep T-bill yields relatively contained." JPM's piece adds, "There is also uncertainty as to how MMF AUMs evolve in 2H. Beyond the seasonal aspect that typically drives flows into institutional MMFs, to the degree that the virus gets worse relative to expectations, companies may want to top up more of their cash, issue more as a liquidity insurance, and perhaps be more proactive in trying to refinance maturities in the coming year, all of which would suggest more government MMF demand. Furthermore, when Treasury makes use of the cash sitting at the TGA, this also releases more reserves in the system, though the size and timing of these flows are quite uncertain. Taken together, how these factors evolve will have implications for T-bills/OIS and until we get more clarity, T-bill yields are likely going to be range bound, if not move modestly lower."
