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US Is Shrinking T-Bill Supply at Just the Right Time for Investors


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(Bloomberg) — A pullback in Treasury bill supply is coming at an ideal moment for investors who’ve already gorged on the debt as the Federal Reserve looks to begin tapering its balance sheet unwind.

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Wall Street is on alert ahead of the Treasury’s Wednesday refunding announcement, with most prepared for one last increase in sales of long-term debt. Already, the department’s latest borrowing estimates imply a reduction in bill sales of more than $250 billion between April and June, according to Wrightson ICAP.

The gap between total money-market fund assets and total bills outstanding has been narrowing, an indication that appetite is fading for the short-dated government debt. At the same time, usage of a key Fed facility — which has become a proxy for some on Wall Street to track excess liquidity in the financial system — has plummeted below $600 billion from about $2.25 trillion in May.

“The market may soon hit a turning point on absorbing bill supply,” said Jefferies LLC senior economist Thomas Simons. “Treasury’s efforts to term out the debt through bigger coupon auctions look very prudent when viewed in this context.”

While the Treasury typically sells large amounts of securities due in a year or less before US tax income starts flooding in around April, issuance has been ample for quarters.

The amount of Treasury bills outstanding has swelled to $5.676 trillion as of the end of December, a $1.7 trillion increase since the government suspended the debt ceiling in mid-2023. That’s about 21.5% of total debt outstanding and above the 15% to 20% threshold recommended by the investors, dealers and other market participants who make up the Treasury Borrowing Advisory Committee.

Around the time that deluge of supply started, there was over $5 trillion sitting in money markets. More than $2.2 trillion of that sum was parked at the Fed’s overnight repurchase agreement facility, or RRP, where eligible counterparties could earn a market rate on cash.

But the flood of bill issuance has since made the central bank’s facility a less-lucrative place to stash cash. Firms instead began favoring Treasury bills and private repo-market activity, dragging balances at the RRP to just $578 billion as of Tuesday. Usage is expected to drop below $500 billion in the coming days as Treasury auction settlements suck even more money out of the front end to finance the purchases.

To market participants, that drop is crucial to monitor. Some Wall Street strategists believe that once the RRP facility is empty, the central bank will have to slow or altogether stop its balance sheet unwind, a process known as quantitative tightening.

The Treasury is evidently also watching, asking in a quarterly survey of primary dealers for feedback on how money markets are likely to be affected by the Fed’s QT program.

Barclays Plc strategist Joseph Abate is already laying out scenarios tied to less bill supply and weaker investor demand, saying that the Treasury’s borrowing estimates signal that QT will continue at its current pace until the end of June.

“Structural demand for bills is likely to soften this year,” he wrote in a note to clients. “We look for money fund balances to hold steady or fall, while rate cuts will reduce the attractiveness of bills relative to overnight repo.”

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