Instead of putting the money to work in the market for overnight repurchase agreements to buy the highest-yielding securities, many fund managers like Federated Investment Management favor longer-dated bills because of the likelihood of more rate cuts by the Fed.
It makes more sense to buy a “one-year bill than buying a one-month and rolling it over,” said Federated CIO Deborah Cunningham.
That kind of pullback from the repo market, where money market funds typically lend out cash in return for yield, may have caused the overnight repo rate to rise above the Fed’s target range last week, both before and after the central bank lowered rates. That, in turn, prompted a surge of dealer demand for the New York Fed’s overnight repo operations, which on March 4 attracted the most bids since the backstop began in September.
Of course, there’s nothing to stop the Treasury from issuing more bills to address any potential scarcity. Some market watchers expect any fiscal package from the Trump administration to cushion the economy from the virus will be funded with bills, which may alleviate some of the shortage.
Mnuchin Says Treasury May Forgo Seasonal Cuts to Bill Issuance
Others are wondering whether the Fed will tweak its bill buying program to include short-dated coupon securities, something the bank has avoided because it doesn’t want to appear to be engaging in quantitative easing, or QE. (Though given how little room it has for further cuts, some say the coronavirus fallout may force the Fed’s hand anyway.)
“It’s still probably best to continue with just bills because it’s the least messy way forward,” said Thomas Simons, a money-market economist at Jefferies. “It’s still probably true because adding coupons does add problems the Fed wants to avoid.”
Either way, short-term markets may not get any relief until the Treasury plans on issuing more bills again, possibly in the third quarter, according to Teresa Ho, a strategist at JPMorgan.
“There’s too much cash chasing too few assets,” she said.
This article was provided by Bloomberg News.