A deluge of Treasury issuance unleashed in the wake of the early June lifting of the U.S. debt-ceiling by Congress has been working its way through the plumbing of financial markets, so far, without much of a hitch.
Investors, however, might consider this rationale for waiting a bit, instead of buying new Treasury bills that will refill U.S. coffers run low by the debt-ceiling fight.
“We continue to believe bills are still biased cheaper in the weeks ahead,” BofA Global’s rates team led by Mark Cabana, wrote in a Wednesday client note. “Our core message to front end investors: be patient in the face of elevated supply.”
As part of their argument for waiting, the team took a look at periods of past heavy bill supply. They found the 3-month Treasury bill versus the benchmark “overnight indexed swap” (OIS) rate should cheapen roughly 5 basis points for every $100 billion of net new supply.
Given their estimate for $1.4 trillion of expected T-bill supply through the next six months, the 3-month bill should cheapen by 76 basis points relative to OIS (see chart), which is a proxy for overnight rates.
The trend hasn’t yet taken off, despite some $209 billion in net new bill supply since the debt-ceiling deal was reached on June 3. The delay can be partly attributed to an eagerness among investors to lock in higher yields for longer, according to BofA Global.
The team pointed to prime money-market funds adding about 3 days to their weighted average maturity since the early June debt-ceiling resolution, bringing it to 28.4 days, according to BofA data, while government money-market funds added 1.8 days.
Related: Why this $6 trillion pile of cash isn’t heading for stocks any time soon
The 3-month Treasury yield
TMUBMUSD03M,
was pegged at 5.29% on Wednesday, down from a trading this month of 5.42% on June 2, according to FactSet data.
At the same time, demand last week for the Federal Reserve’s popular reverse repo facility fell below the $2 trillion mark for the first time this year, as money-market funds looked to deploy into the flood of bill issuance, instead of collecting 5.05% overnight at the central bank.
T-bill issuance includes securities that mature in four to 52 weeks. Treasury yields, even for longer longer-dated securities, in this rate-hiking cycle haven’t been as high in about 15 to 20 years, according to FactSet data.
BofA still thinks continued aggressive tones from the Fed on interest rates, as well as other factors, will favor investors who wait.
“Be patient in the face of supply to allow for cheaper bills,” Cabana’s team said.
Read next: Lawrence Lindsey sees Fed continuing rate hikes into 2024, with terminal rate having a ‘6 handle’
Stocks were lower Wednesday, with the Dow Jones Industrial Average
DJIA,
down less than 0.1%, while the S&P 500 index
SPX,
and Nasdaq Composite
COMP,
were lower after recently touching their highest levels in more than a year.
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