U.S. Treasury Update

After the restoration of federal spending restrictions, the supply of the safest US government bonds has been reduced this month, pushing up prices and reigniting problems in the money market funds industry, which has been rescued by the Federal Reserve once this year.

After the United States extended the average maturity of new bond issuances, Treasury bills—US bonds that mature in a year or less—have been scarce this year.After Congress failed to pass legislation, supply was hit again In July This will allow the Ministry of Finance to issue new debt-that is, raise the debt ceiling.

Analysts estimate that so far this year, the issuance of new Treasury bills has been reduced by approximately US$900 billion. The limited supply pushed up prices, and yields—the premium over which investors hold bonds—dropped to slightly above zero.

When some yields become negative in May, The Federal Reserve intervened to set a lower limit for these interest rates. But the deteriorating supply squeeze has been severe enough, and despite the Fed’s support, interest rates are still falling to zero.

Jefferies’ money market economist Tom Simmons said: “The current capabilities of the Federal Reserve tool are helpful, but we are beginning to see it run out of gasoline.”

Minimum rate of return Cause problems for money market funds, A $4.4 trillion industry that relies heavily on short-term debt, wiped out their profits or forced them to close their doors to new investors. Money market funds are the key to the global financial system because they are used by investors as a safe place for short-term cash storage.

“Because interest rates are very low, it is difficult for money funds to sustain their livelihoods. Unfortunately, becoming a money market fund is not a favorable environment. It seems that zero interest rates are not enough. It is just piles up,” said Genna Digo, senior U.S. interest rate strategist at TD Securities De Berger said.

Goldberg said this dynamic will only get worse next month. He does not expect spending restrictions to be lifted at least until the end of October.

In recent years, the US debt ceiling has been affected by the fringe policy of partisanship. Although Republicans and Democrats in Congress have reached agreements in the past to suspend these restrictions, investors believe that negotiations will continue to the end. The Ministry of Finance is not expected to run out of funds until the end of October or early November.

After reduced supply earlier this year caused some short-term interest rates to become negative, the Fed supported the market by paying interest on funds in its overnight reverse repurchase facility. This tool provides another place for money market funds to store cash, thereby raising these short-term interest rates.

The problem is that RRP facilities are now Been used all the time exist Record level, And is approaching the Fed’s restrictions on its use.

“This shows that-because of the limited number of participants in the federal funds market-they are reaching the counterparty limit through overnight reverse instruments. Therefore, if they reach the counterparty limit, it is reasonable that others may also reach the counterparty limit. Because we continue to see record highs often,” Simmons said.

The Fed may eventually increase the counterparty limit for the tool, which may ease some pressure on the market, and it said it is open to this option. In a few minutes From its July decision-making meeting. But due to the monetary and fiscal stimulus measures associated with the pandemic, there is still a lot of money in the economy chasing too little investment. This may keep the yield on bills low and put pressure on money market funds.

“That bad market is trapped between rocks and difficult places. There is nowhere to go,” Goldberg said.

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