Citi Global Strategist Matt King Is Listening to ‘Money Market Nerds’

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The Treasury General Account is having a moment.

Traders of U.S. short-term interest rates have been obsessed with it for more than a year -- during which it quadrupled in size to $1.61 trillion as of Feb. 5. But now that the federal government’s stockpile of cash-on-hand is poised for a big drop, it’s gaining attention as a possible source of liquidity that can sustain financial markets more broadly at record highs.

Citigroup Inc. global markets strategist Matt King, in a Feb. 8 essay titled “Timing the Market Top,” argued that bank reserves -- where the TGA cash will wind up -- are a bigger driver than even central bank asset purchases. A decline in the range of $1 trillion to $1.5 trillion by July appears likely, effectively delivering liquidity back into private investors’ hands, he wrote.

“The only real debate seems to be whether this is just an issue for money market nerds, or whether it has system-wide relevance,” King wrote. “Both a long-standing conviction that money-market plumbing has an underappreciated significance, and some additional empirical evidence, make us suspect the latter.”

Citi Global Strategist Matt King Is Listening to ‘Money Market Nerds’

Reserves -- cash that banks keep at the Federal Reserve -- represent one side of U.S. dollar funding market, in which owners of Treasury and mortgage-backed securities post them as collateral for short-term loans. The four lenders that dominate that market control about 25% of the reserves in the U.S. banking system, according to researchers at the Bank for International Settlements.

King’s interest is in frothy valuations, and how long they might last. For that, he wrote, “you need to follow the money.” The real yields on Treasury Inflation-Protected Securities have been a reliable guide to moves in risk assets, as have asset purchases by central banks globally -- including the Fed’s $120 billion monthly purchases of Treasuries and mortgage-backed securities. But they provide “little reason to expect any sort of ‘melt-up’ beyond what markets have done already.”

The Treasury cash balance, on the other hand, “suggests a radically different outlook.” Citi a few months ago shifted to using a metric for the Fed “which looks at changes in bank reserves rather than simple securities purchases, largely so as to adjust for the effect of changes in the Treasury General Account,” King wrote.

The Fed began its current program of asset purchases during the March 2020 liquidity crisis. It removed $3.4 trillion of securities from the market by year-end, at a pace that stabilized at $120 billion monthly in June. Fed policy makers have said it will continue until “substantial further progress” toward its employment and inflation goals has been made.

The cash balance swelled to a peak of $1.83 trillion in July as the Treasury Department ramped up borrowing to pay for pandemic relief spending, which failed to materialize as quickly as expected. Last week, the department forecast a drop to $500 billion by the end of June. An even bigger decline may occur if lawmakers fail to reach an agreement suspending the federal debt ceiling.

“The critical question is whether this is indeed the ‘right’ metric to be tracking for markets,” King wrote. “If it is, then for several months the stimulative effect of $120 billion in monthly Fed purchases looks likely to be more than tripled.”

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