“In the past few weeks we have seen a record level of indirect bidders during US Treasury auctions,” she says. The government’s growing reliance on so-called indirect bidders has been evident for some time, according to Althea Spinozzi, a fixed-income strategist at Saxo Bank A/S. These buyers are expected to free up cash for their purchases by liquidating bank deposits, exacerbating a capital flight that’s led to a cull of regional lenders and destabilized the financial system this year. They’ll turn up at the weekly Treasury auctions, but not without a knock-on cost to banks. That leaves everyone else: the non-banks. Historically the most prominent buyers of Treasuries, they’ve lately stepped back in favor of better yields on offer from the Fed’s reverse repurchase agreement facility. It’s assumed their purchases, from their own cash pots, would leave bank reserves intact. The most benign scenario is that supply is swept up by money-market mutual funds. “Any decline in bank reserves is typically a headwind,” says Dirk Willer, Citigroup Global Markets Inc.’s head of global macro strategy. Citigroup modeled historical episodes where bank reserves fell by $500 billion in the span of 12 weeks to approximate what will happen over the following months. There are various buyers for short-term Treasury bills: banks, money-market funds and a wide swathe of buyers loosely classified as “non-banks.” These include households, pension funds and corporate treasuries.īanks have limited appetite for Treasury bills right now that’s because the yields on offer are unlikely to be able to compete with what they can get on their own reserves.ĪLSO READ| Prince Harry, Meghan to ‘stop talking about royal family completely' because…īut even if banks sit out the Treasury auctions, a shift out of deposits and into Treasuries by their clients could wreak havoc. What happens as the billions wind their way through the financial system isn’t easy to predict. With default narrowly averted, the Treasury will kick off a borrowing spree that by some Wall Street estimates could top $1 trillion by the end of the third quarter, starting with several Treasury-bill auctions on Monday that total over $170 billion. The measure brokered between Biden and House Speaker Kevin McCarthy limits federal spending for two years and suspends the debt ceiling through the 2024 election. The US has been relying on extraordinary measures to help fund itself in recent months as leaders bickered in Washington. It’s a trend that, together with Fed tightening, will push the measure of liquidity down at an annual rate of 6%, in contrast to annualized growth for most of the last decade, JPMorgan estimates. It’s only in severe crashes like the Lehman crisis where you see something like that contraction.” “We have rarely seen something like that. “This is a very big liquidity drain,” says Panigirtzoglou. The sales, set to begin Monday, will rumble through every asset class as they claim an already shrinking supply of money: JPMorgan estimates a broad measure of liquidity will fall $1.1 trillion from about $25 trillion at the start of 2023. macro strategists offer a similar calculus, showing a median drop of 5.4% in the S&P 500 over two months could follow a liquidity drawdown of such magnitude, and a 37 basis-point jolt for high-yield credit spreads. strategist Nikolaos Panigirtzoglou estimates a flood of Treasuries will compound the effect of QT on stocks and bonds, knocking almost 5% off their combined performance this year. The Federal Reserve’s program of quantitative tightening has already eroded bank reserves, while money managers have been hoarding cash in anticipation of a recession. The negative impact could easily dwarf the after-effects of previous standoffs over the debt limit. This will be yet another drain on dwindling liquidity as bank deposits are raided to pay for it - and Wall Street is warning that markets aren’t ready. The White House is lit in orange in honor of Gun Violence Awareness Day Friday, June 2, 2023, in Washington. With a debt ceiling deal freshly signed into law Saturday by President Joe Biden, the US Treasury is about to unleash a tsunami of new bonds to quickly refill its coffers.
0 Comments
Leave a Reply. |