It is possible, even likely, that T-bill rates will be negative for a significant period
The US Treasury market, supposed to be the supplier of the world’s risk-free assets, is facing a very educational 2021. As Mark Cabana, head of US rates strategy for BofA Securities, says: “There is going to be a train wreck at the front end of the [Treasury] curve next year. There is way too much cash chasing too little paper.”
Given what we know today about the US government’s likely spending over the next several months and its cash on hand, it is possible, even likely, that Treasury bill rates will be negative for a significant period of time. Other key interest rates, such as SOFR, the new lending benchmark, could well follow T-bills into negative territory.
Managing the effects of negative bill rates on banks and other market participants will require the ingenuity of the Federal Reserve and the new Treasury staff in applying their policy “toolbox”. All while avoiding any unforeseen consequences, such as we saw in March this year.
It would help everyone concerned if there were anything close to a political consensus on the path of federal spending and borrowing over the near future, never mind major policy changes. At the moment, the Treasury dealers and market participants are like an engine-room gang in a nuclear aircraft carrier, fighting over who occupies the bridge while there’s a slow-burning fire (the pandemic) in the crew’s quarters.
Overstatement? Consider this: under one of the laws governing Treasury issuance, the Treasury General Account (the US government’s current account) has a present balance of a bit more than $1.5tn. That is historically high. Under the budget law adopted in August 2019, which includes a debt ceiling limit, the TGA should be reduced to $133bn by August of next year.
Assuming, generously, that something like the current stimulus bill outline turns into executable law, that leaves the Treasury needing to allow somewhere between $500bn and $900bn of T-bills to mature in the first half of the year without being replaced by new issuance. Depending on the breaks.
That is a lot of cash that money market funds and others would need to redeploy. Oh, and Treasury securities provide another essential function, in that they can be pledged as collateral for variation margin calls at dealers or clearing houses if there’s any market volatility next year.
Volatility in Treasury markets would be a nice change.
Yes, 3m Treasury bill yields have plunged since September as The Fed has continued increasing the size of their balance sheet … with no end in sight.
To quote Martha and the Vandellas, no where to run, no where to hide.
