The shortage of T-bills is about to get a whole lot worse.

All along, Wall Street has been bracing for a record decline in second-quarter net issuance as the Treasury cuts supply in response to tax season and the Federal Reserve buys bills to boost reserves.

But now, supply is set to get squeezed even more as the Covid-19 scare causes demand for Treasuries to soar. Money market funds in particular are rushing to lock in rates before they reach 0%, prompting strategists at JPMorgan Chase & Co. to say demand could outstrip supply by over $1 trillion next quarter.

“We made the case that scarcity was about less supply and Fed demand,” said Priya Misra, the global head of rates strategy at TD Securities. Now, “we have to add the investor-demand component.”

The most immediate impact will be on savers, who can expect the minuscule yields they’re getting on money market funds to keep shrinking. But analysts say the knock-on effects could extend well beyond that. They could spill into overnight lending markets and hamper the Fed’s ability to control its policy rate -- just as the economic fallout from the coronavirus starts to emerge.

While Treasury Secretary Steven Mnuchin indicated on Wednesday the U.S. may forgo seasonal cuts to bill issuance to fund a possible extension of the April 15 tax filing deadline, as of now, supply is still set to decline.

The first cuts will come Thursday, as bills the Treasury issues for cash management purposes come due and last week’s bill auctions settle. That will reduce the net amount outstanding by roughly $42 billion.

Margaret Kerins, global head of fixed-income strategy at BMO Capital Markets, says the magnitude of the supply-demand imbalance will largely hinge on the money market fund industry.

“The size of the flows into money market funds and their subsequent demand for securities will be a key factor in how large the bill scarcity is,” she said.

Money market funds that buy government securities attracted $53 billion in new money in the week ended March 4, according the Investment Company Institute, pushing total assets to a record $2.75 trillion.

First « 1 2 » Next