By Alexandra Harris
The Treasury’s bill auctions Thursday drew the lowest yield in more than a year as an excess of cash in front-end of fixed-income markets kept borrowing costs anchored near zero.
The U.S. government’s $40 billion sale of four-week bills on Thursday went off with a yield of 0%, the first time that has happened since March 2020, in the early months of the coronavirus pandemic. The Treasury also sold $40 billion of eight-week bills at 0.01%. Existing rules prevent issuing debt with negative yields at auction.
The four-week sale last came in at that level when anxious investors were pouring cash into money-market funds. Fast forward to this year and rates on Treasury bills have been under pressure with the government reducing issuance of short-term securities to draw down its mammoth cash balance so it can comply with a possible debt-ceiling reinstatement and to cover expenses.
“Given the outlook for bill supply, zero percent stops are going to be the norm going forward,” Jefferies economist Thomas Simons wrote in a note to clients.
The rate on overnight general-collateral repurchase agreements remains cemented at zero, while yields on Treasury bills maturing in three months or less range from minus 0.018% to plus 0.01%. As a result, participation in the Federal Reserve’s facility for overnight reverse repurchase agreements is surging to the highest levels in more than a year.
Pressure on secured rates also spilled over to unsecured benchmarks, with the Overnight Bank Funding Rate dropping 1 basis point to 0.05% as of April 28, according to New York Fed data released Thursday.
Still, Fed policy makers have yet to make adjustments to benchmarks they use to control short-term funding costs. Chairman Jerome Powell said Wednesday the effective fed funds rate — the bank’s key target — remains within the 0% to 0.25% range and “money market conditions are fine,” while acknowledging there’s room for further downward pressure.
In its survey of dealers ahead of the refunding announcement on May 5, the Treasury asked about “the impacts that reinstatement of the debt limit could have on the Treasury market as well as on broader financial markets.” Related to that, it also sought comment on expectations for bill supply over the next three months and adjustments in issuance.
Under current law, the Treasury’s cash balance must return to around $130 billion by July 30, the level where it was when the borrowing limit was suspended. It’s currently at $959 billion, and to close the gap it has to reduce debt in addition to covering the recent pandemic stimulus payouts. And that means downward pressure on short-term rates isn’t likely to ease anytime soon.
The Treasury has paid down about $415 billion of T-bills this year. Credit Suisse estimates about another $500 billion in paydowns may be needed, while TD Securities strategists believe Treasury will need to trim supply by another $300 billion to $400 billion by the end of July.
“This means more pain for money fund investors,” said TD Securities strategist Gennadiy Goldberg. “The fear that there won’t be enough product for investors tomorrow is what is driving front-end rates lower.”