T-Bill Sales to Get Slashed Soon as Debt-Cap Deadline Draws Near

(Bloomberg) — The US Treasury Department is on the cusp of once again having to slash the amount of Treasury bills floating around, potentially creating ripples in funding markets as investors chase a dwindling supply of securities or hunt for other places to stick short-term cash.

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With the administration taking various measures to avoid crashing into the statutory debt limit — which Congress shows little sign of lifting anytime soon — the department is expected to start shrinking the amount of short-term securities it sells at weekly auctions.

Wrightson ICAP’s Lou Crandall, a veteran observer of money markets, reckons that could start happening in the next week or two, with the first signs potentially coming at this Thursday’s announcements about upcoming three- and six-month sales.

Crandall estimates gross weekly issuance across the five regular bill maturities — including also the 1-, 2- and 4-month bills — will fall in March to $241 billion, down $38 billion from February.

The cuts will signal the beginning of a “sustained but gradual decline” in bill supply, he wrote in a Feb. 26 note to clients.

Even without a debt-ceiling crunch on the horizon, the government tends to reduce its borrowing activity in March and April as it collects income taxes. But after that, it has historically tended to ramp up issuance once again as the excess generated by tax receipts dissipates.

This time around, though, the Treasury will have to continue slashing the size of bill auctions and spending down its pile of cash in order to preserve its borrowing authority under the debt limit.

Analysts across Washington and Wall Street have warned the US is likely to exhaust extraordinary measures that would allow it to continue paying debts sometime in the third quarter, though the so-called “X-date” could be pulled forward if tax receipts are weaker than expected.

Including this week’s settlements, Treasury has issued roughly $377 billion of bills this year on net, according to government data. Wrightson estimates that by June 29, the supply of bills is likely to have fallen by roughly $350 billion from its late-February peak.

That shift will wipe out most of the increase in bill supply that took place in the first part of this year, sending the market back toward the kind of supply-constrained conditions that characterized it for much of the past couple of years.

Such swings in bill supply would not only make the securities expensive relative to other instruments like overnight index swaps, but also motivate investors that have access to the Federal Reserve’s overnight reverse repurchase agreement facility to park more cash there.

At the same time, yields on those bills most vulnerable to a debt ceiling-related technical default could surge as investors try to avoid those particular issues.