The distortions in U.S. money-market rates have begun, and they’re only going to become more acute.
Yields on Treasury bills are flirting with zero as the government removes supply, with securities maturing next week already trading at negative levels in the secondary market. Yet there’s still $4.3 trillion in money markets -- with about 85% in government funds that primarily invest in assets like T-bills and repurchase agreements -- searching for investments, according to Jerome Schneider, head of short-term portfolio management and funding at Pacific Investment Management Co.
“As people look to be more defensive, what they’re doing is finding a haven in money-market funds, in the front end of the yield curve, and in doing so, created a pretty big supply-demand mismatch,” Schneider said in a Bloomberg Television interview. That “could potentially lead to more market imbalances and actually the potential for negative rates in the T-bill sector for over the next few weeks and months, he added.
The downward pressure from yields is coming from the Treasury Department’s decision to start issuing fewer bills as it makes plans to draw down its near-record $1.57 trillion cash balance to cover expenses and comply with the possible debt-ceiling reinstatement. It already stopped selling 15- and 22-week cash management bills, or CMBs, and has left the size of next week’s T-bill auctions unchanged. As a result, the sales will lead to a redemption of roughly $96 billion of short-term paper, making the competition for assets more fierce.
It’s currently happening in the repo market, where the monthly influx of principal and interest payments from the government sponsored entities have pushed the rate on overnight general collateral repo toward zero. The pressure has spilled over into the market for fed funds, which dropped to 0.07% as of Feb. 18, New York Fed data show.
A further decline in the Fed’s policy target rate increases the odds that the central bank will have to deploy its tools like tweaking its rates on the overnight reverse repo facility and interest on excess reserves to maintain control. Still, Schneider says it’s unlikely officials will have to use them in the near term.
Regardless, he bets T-bill rates are going to be at these levels for awhile.
“For those people being of a defensive mantra and being in those money-market funds, zero yields and even negative yields are going to be something they have to contend with for the foreseeable future,” he said.
This article was provided by Bloomberg News.