NEW YORK, Feb 10 (IFR) - We have been trying to predict what path the Treasury
will take with T-bill issuance as we head into the debt ceiling extension
deadline on March 15, just over one month from now. The fact remains that on
that day (and that day only) the Treasury will need to reduce their cash balance
to a measly $23 bn,(it has been as high as $399 bn and currently sits around
$310 bn) on the day of the suspension expiration before they can implement
extraordinary measures to make room under the existing limit.
The Treasury made it clear this week that it will do whatever is possible under
these somewhat ridiculous guidelines to minimize the impact to the Treasury's
cash cushion as well as try to limit the supply impact for investors that are in
need of high quality liquid assets (HQLAs). The announcement and auction of a
$50 bnMarch 15 Cash Management Bill (CMB) is the start of a ramp up in CMBs to
help keep the cash balance and market supply of HQLAs as liquid as possible
heading into this period.
Given the current Q1 borrowing projections, higher than many were predicting,
the T-bill pay-downs required to reach the $23 bn cash balance will be somewhat
smaller than expected. They will start the process next week with significant
reductions in the 1-month maturity given the fact that next week's 1-month will
mature on March 16 and count in the cash balance calculation. Look for 1-month
bills to get cut in half over the next four weeks to a low of around $20 bn by
the week of March 9. This will pay-down about $80 bn in supply in just that
maturity. At the same time the Treasury can tap this week's CMB to add cushion
to the supply and cash balance and still not impact the expiration date cutoff
Three and six month issuance may see small reductions if needed, but given the
current projections, issuance can remain unchanged throughout this period. Even
if they remain unchanged at $34 bn and $28 bn respectively, they are still
paying down over $40 bn vs. the maturing issues from now through March 15. That
combined with the $80 bn in 1-month reductions should be enough to get them to
the target $23 bn balance.
At the same time, look for CMB issuance to ramp up around February month end for
settlement March 1 to meet the Treasury's cash needs and social security
payments. Look for them to tap the March 15 maturity possibly several more times
as needed. They will also possibly look to issue a longer dated April 17 tax
date CMB the week of March 13 to settle on March 16 to jump start the ramp up of
the cash balance after March 15.
So what happens on March 15 given this scenario of reduced weekly supply and a
very large CMB maturity on that date? The Treasury could see as much as a $100
bn drop in excess cash for that day before rebounding quickly the next day with
the settlement increased weekly issuance and the potential tax date CMB. The
Treasury will have plenty of room under extraordinary measures to issue whatever
it needs and will not waste any time in doing so. Look for that $100 bn or so
reduction to be added back as quickly as within one week of the deadline date.
Hopefully the impact on investors and repo levels will be minimal. With proper
planning, investors can utilize a mixture of weekly and CMB issuance to blend
their maturities only experiencing one day of stress on March 15. Investors can
tap the RRP or overnight repo markets for added liquidity on that day if needed.
Overall we are not anticipating any significant liquidity issues for this
event. T-bill yields have remained stable with the curve very flat due to the
front loaded issuance. Supply technical pressure remains but should be less
than originally anticipated.
Eric.Diamond@TR.com / rb