Liquidity Conditions Begin To Tighten as Treasury Borrowing Accelerates
SALES END TOMORROW - Monday, May 25 at 9:30 AM ET - Will not be extended
$65 / Month down from $85
$550 / Year down from $750
To build a bit more on the idea of Treasury bill liquidity flows from the video and update on Saturday, we do have a sense of issuance size between now and the end of September based on the Treasury Quarterly Refunding announcement, which projects borrowing of $671 billion. That is higher than the $577 billion borrowed during the January-to-March period.
Basically, if the Treasury has indicated that coupon sizes will remain unchanged, then a good amount of the additional $100 billion in issuance would likely need to come through bills. Even if bill issuance remains unchanged from the first quarter, there will still be a sizable amount of liquidity removed from the market by the bill issuance.
So how will we know if this T-bill issuance is putting strain on markets? Fairly easily — by watching changes in SOFR on a daily basis.
I do not think it is a coincidence that we saw SOFR tighten materially in the fall and then ease materially this spring after the reverse repo facility hit its lower bound in October and market conditions began to tighten.
But now that we are past the paydown phase, we should begin to see SOFR creep higher again and spreads start to widen. This coming week should provide a good test of that, with roughly $100 billion set to be drained from the market. If that liquidity drain matters, we should see SOFR rates move higher.
The early signs are already there, with the weighted-average repo rate on Friday trading at 3.61% amid sharply increased Treasury issuance last week.
The liquidity flows that had been supportive are now beginning to reverse, and in many ways already have. My guess is that when we get the SOFR reading on Tuesday morning, it will print closer to 3.60% rather than 3.50%, suggesting that the ramped-up issuance over the past two weeks is beginning to absorb excess cash from the system.
The best real-time proxies we have for tracking liquidity conditions remain Bitcoin and, to a lesser degree, the Invesco Global Listed Private Equity ETF (PSP) and the Financial Select Sector SPDR ETF (XLF).
We will see where this all goes over the next few months.
–Mike
Glossary by ChatGPT
Coupon Issuance — Treasury securities with fixed interest payments issued across longer maturities such as notes and bonds.
Liquidity Flows — The movement of cash and funding availability through financial markets and the banking system.
Paydown Phase — A period when Treasury balances decline, effectively adding liquidity back into the financial system.
Reverse Repo Facility — A Federal Reserve program allowing money market participants to park cash overnight in exchange for Treasury collateral.
SOFR — The Secured Overnight Financing Rate, a benchmark interest rate based on overnight Treasury repo transactions.
Spread Widening — An increase in the difference between two interest rates or yields, often signaling tighter financial conditions.
T-Bill Issuance — The sale of short-term U.S. Treasury securities used to fund government borrowing needs.
Weighted-Average Repo Rate — The average interest rate paid in repurchase agreement transactions, weighted by transaction size.
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