Bond Traders’ Message to Mnuchin: Just Give Us Lots of T-Bills

(Bloomberg) -- Get ready for the U.S. government to issue more short-term debt. A lot more.

While Treasury Secretary Steven Mnuchin long talked up the idea of selling ultra long-term bonds, most agree the money from the $2 trillion coronavirus relief package needs to get into the hands of Americans fast. And the best way to do that, analysts say, is to keep it simple and ramp up sales of T-bills.

The reasons are clear. For starters, investors have been practically screaming for more T-bills, and little of anything else. They pushed bill rates below 0% in the open market as demand for money funds that invest in short-term U.S. debt soared to a record. Then there’s the fact that unlike longer-term Treasuries, which the government prefers to issue on a pre-set schedule, T-bills can be sold at just about any time. There are also few worries about liquidity, which can’t be said for 50-year bonds. So except for perhaps a bruised ego, Mnuchin has almost nothing to lose by going big with T-bills.

Indeed, in an echo of Hank Paulson’s crisis-era playbook, the Treasury has since mid-March already issued $270 billion of so-called cash management bills, a type of T-bill used to quickly bridge funding gaps or adjust borrowing needs. There’s much more to come. According to Goldman Sachs, net bill sales will top $1.2 trillion in April and May alone, the biggest jump on record.

“The name of the game is cash -- quickly -- and that’s going to be raised in bills and fortunately, there’s plenty of appetite for them,” said Zachary Griffiths, a rates strategist at Wells Fargo. “Bills are fungible and essentially like cash -- and that’s what people are clamoring for right now.”

On Thursday, the Treasury will auction $80 billion of 4-week bills and $60 billion in 8-week bills. Both amounts would top previous records. (T-bills have maturities of a year or less.)

Demand is at fever pitch. A staggering $594 billion poured into U.S. government money-market funds -- which are among the biggest buyers of bills -- in the two weeks ended March 25. Total assets reached a record and Fidelity Investments closed three of its money-market funds to new investors. On Monday, buying pushed the 4-week bill rate down to -0.256%.

“Treasury also can afford to ramp up bill sales, given how low rates are,” said Jay Barry, a strategist at JPMorgan Chase. “And money market funds and central banks just can’t find enough bills for now.”

That’s a good thing because the U.S. is projected to borrow more than it ever has before to cushion the economic blow from the coronavirus. This fiscal year, JPMorgan sees the budget deficit widening to a record $2.4 trillion. It expects roughly 50% of the shortfall will be financed through T-bills.

The rest will be funded through increased sales of notes and bonds. Mnuchin also plans to sell 20-year bonds for the first time, which was seen as a compromise solution after his initial proposal to sell 50-year bonds fell flat. Under Paulson’s crisis-era watch, the Treasury brought back the 3-year note after an 18-month suspension of sales, revived the seven-year note and boosted the frequency of 30-year bond sales.

“We’re very focused on executing the existing plans and doing the government financing, which is being very well received,” Mnuchin told CNBC Wednesday.

Wall Street Struggles to Guess Bond-Market Impact From Stimulus

While the market might not be clamoring for 50-year debt or even 25-year bonds as much as it wants T-bills, White House officials including Mnuchin and economic adviser Larry Kudlow revisited the idea as recently as last month.

Whatever the case, the Federal Reserve’s bond purchases will help to absorb the new debt supply. The central will buy a total of $341 billion in bills and $1.13 trillion in notes and bonds through the end of June, according to JPMorgan. After accounting for the Fed’s purchases, net bill issuance will amount to roughly $890 billion, the firm estimates.

The gloomy economic outlook will likely keep Treasuries of all maturities in demand and put a lid on longer-term yields, at least for a while. With the U.S. shutting down because of the virus, Goldman forecasts the economy will contract 34% on an annualized basis this quarter. It also expects the jobless rate to hit 15% by mid-year. The bank then sees a sharp snapback in growth in the third quarter, with gross domestic product expanding a 19% pace.

“There appears to be little risk that the market clearing price is at much higher yields” for longer-term debt, said Michael de Pass, global head of U.S. Treasury trading at Citadel Securities. “But if there are positive developments regarding the virus and a quicker than anticipated recovery begins, then all the stimulus could provide the tinder for an upside surprise in inflation.”

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