Source: Wall Street
Six months ago, Wall Street was talking about the danger of the US Treasury issuing trillions of dollars of short-term treasury bonds. Now, short-term investors face the opposite challenge: because of the decline in Treasury auctions, they have a lot of cash on hand to consider where to invest.
Now, traders worry that the supply of short-term debt on the market continues to decline, which may be much lower than demand, thus disrupting the money market. Two years ago, the mismatch between supply and demand for short-term debt prompted investors to deposit trillions of dollars in the Fed's liquidity reverse repurchase facility. This comes at a time when the Fed is considering ending the reduction of its balance sheet, and the supply of short-term debt could disrupt the Fed's path to removing quantitative tightening (QT).
The Treasury Department estimated that short-term bond sales would fall by $100 billion to $150 billion in April, while actual short-term bond issuance fell much more than expected in April, according to the Treasury's plan for refinancing Treasury issuance in the coming quarter, according to the Treasury's plan for the coming quarter in late January. Net issuance reached-$196 billion.
On Wednesday, the Treasury will unveil a new quarterly refinancing plan, which is expected to signal a further decline in short-term Treasury issuance between May and July. Wells Fargo and Goldman Sachs expect net supply of short-term debt to be cut by $321 billion and $250 billion in the second quarter, respectively. Bank of America is even expected to cut by $401 billion.
Mark Cabana, head of US interest rate strategy at Bank of America, believes that short-term debt does have the risk of a serious imbalance between supply and demand and a serious shortage of demand, calling it a "shocking" risk because it "completely subverts who will buy all suppliers of US Treasuries."Europeanroulette?' The logic of. "
As the supply of short-term debt shrinks, where will a lot of cash go? Judging from past experience, when there is a short-term shortage of assets, the Fed's financing instruments will "suck up money".
Because the US government released a lot of water and the Federal Reserve presented super QE after the outbreak of COVID-19, in mid-2022, the amount of RRP, the Fed's reverse repos tool, a barometer of excess liquidity in the financing market, exceeded 2 trillion US dollars, reaching more than 2 billion US dollars at the end of 2022.EuropeanrouletteA historical peak of .5 trillion. The amount of money deposited in RRP accounts has since remained around $2,000bn until last year when the Treasury issued a large amount of short-term debt to "pump out", with a total outflow of about $1.75 trillion out of RRP between June last year and this month. In the middle of this month, Wall Street reported that overnight RRP tool usage fell below $400 billion for the first time in at least three years.
The decline in excess liquidity reflected in the RRP tool is a matter of concern as to how far the Fed can sustain its QT actions before funding markets begin to collapse. At a press conference after the monetary policy meeting last month, Federal Reserve Powell reiterated that the Fed would slow the pace of QT contraction and said that the contraction of the Fed would happen "very soon". It is widely expected on Wall Street that the Fed will announce plans to slow down its schedule after its monetary policy meeting on Wednesday, but forecasts vary as to when it will start to slow.
The Fed has previously said it is watching RRP to determine whether the market has sufficient liquidity. If short-term investors who have accumulated a lot of cash deposit their money into RRP accounts, it may cause the Fed to lose a clear understanding of liquidity, and the situation to end QT will become chaotic. Bank of America's Cabana said that according to the Fed's logic of judging RRP, it can be argued that, given the imbalance between supply and demand, perhaps the Fed should keep the QT longer.
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