Money Markets Seek Treasury Reply to $1.8 Trillion Question
Money Markets Seek Treasury’s Answer to $1.8 Trillion Question
(Bloomberg) -- The U.S. Treasury will soon provide some clues on what’s about to happen with the pile of cash towering over money markets.
The Treasury’s cash hoard at the Federal Reserve -- known as the Treasury General Account -- is close to a record $1.8 trillion. On Monday, officials will offer estimates of where they see it in three months’ time, and how much more short-term cash they expect to raise to help people and businesses through the pandemic. Trouble is, the Treasury’s numbers are riddled with uncertainties, starting with the timing of the hotly-debated stimulus package in Congress.
Big changes in TGA reserves can make big ripples in markets critical to keeping funds flowing. A sudden drop -- such as a $1-trillion-plus stimulus payment -- could flood the banking system with cash, driving rates in a plethora of short-term funding markets lower from fed funds to repurchase agreements to Treasury bills. That’s great for borrowers, including the government, but painful for investors, namely the money market funds with $3.7 trillion of assets under management.
Moreover, efforts to quell the impact of the pandemic have amplified possible swings in the Treasury’s buffer to trillions of dollars rather than the billions before the crisis. That makes it difficult to put much faith in numbers the Treasury will release next week. For example, the current cash balance is about $1 trillion above the target officials provided in May.
“Irrespective of what they say, the cash balance is likely to be elevated,” said Praveen Korapaty, rates strategist at Goldman Sachs Group Inc. “The question is, will they recognize that and move the estimates up, or are they actually going to try to bring down those cash balances?”
A sharp reduction in cash balances would be significant as it would imply a “fairly aggressive reduction in bill supply,” Korapaty said. Goldman raised its forecast for TGA to $1.37 trillion by October from $900 billion, and predicts a sharp drop to $500 billion by year-end, because it looks like the bulk of loan forgiveness under the Payment Protection Program will be deferred to the fourth quarter.
Despite the vast sums the Treasury has on hand, strategists generally still see it selling eye-popping amounts of bills in the months ahead. JPMorgan Chase & Co. projects net supply of $1.225 trillion in July-September. That’s less than half the total last quarter -- when the U.S. in three months raised roughly as much short-term debt as Italy’s government has overall -- but it would prevent any significant decline in money-market rates.
Bill yields have subsided over the past month as the Treasury started cutting back auction sizes, and that’s pulled the spread between the three-month T-bill and the overnight index swaps below 2 basis points, from close to 10 around mid-June. Increased downward pressure risks driving the yield on the three-month bill closer to zero from just below 0.1% now. That would be painful for managers of government money market funds, who are trying to eke out returns on high-quality securities.
Alongside the headline numbers, market strategists will be looking for any concrete signs of a shift in the Treasury’s stance on the cash balance. Back in 2014, officials decided to target a TGA balance of a week’s worth of outflows, with a minimum of around $150 billion. At the start of this year, Treasury Secretary Steve Mnuchin said the cash balance may be boosted for “risk management purposes,” which may mean lengthening that period of outflows. Citigroup Inc. reckons a steady state for the Covid-19 world could be more like $800 billion.
Another wildcard in the Treasury’s updates next week are possible additions to the line-up of T-bill maturities. Treasury is exploring making permanent fixtures of some of the cash management bills that have become regular features of its issuance over recent months. BMO Capital Markets strategist Jon Hill sees the six-week and 15- or 17-week bills as possible candidates for new benchmarks. Any changes will be flagged in the quarterly refunding announcement Wednesday that follows the financing estimates at the start of the week.
The market’s best hope for clarity on spending and funding needs could come from confirmation of the government’s stimulus package in the coming days. But with a $2 trillion gap between the Republican and Democratic proposals, that may be a long shot. They’re unprecedented numbers either way, so the days of predictable and staid money markets are unlikely to return any time soon.
“We’ve run those sort of deficits only during the Second World War,” Goldman’s Korapaty said. “You should expect incredible levels of volatility in cash balances, in bill supply numbers.”
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