Treasury's Flood of Bill Issuance is Latest Test for Market Stability
With the debt ceiling finally settled in Washington, the US Treasury is about to unleash a tsunami of new bonds to quickly refill its vast bank account.
This will be yet another drain on dwindling liquidity as bank deposits are raided to pay for it - worsening the eroded bank reserve from the Federal Reserve's quantitative tightening.
According to $JPMorgan(JPM.US$ strategist Nikolaos Panigirtzoglou, an flood of Treasuries will compound the impact of QT (quantitative tightening) on the performance of stocks and bonds, resulting in a potential decline of nearly 5% this year. The analyst predicts that overall liquidity will decrease by $1.1 trillion from its initial value of around $25 trillion at the beginning of 2023. This decrease will be initiated by multiple Treasury-bill auctions taking place on Monday, amounting to a total of over $170 billion.
This is a very big liquidity drain," says Panigirtzoglou. "We have rarely seen something like that. It's only in severe crashes like the Lehman crisis where you see something like that contraction."
A similar calculus, showing a median drop of 5.4% in the S&P 500 over two months could follow a liquidity drawdown of such magnitude, and a 37 basis-point jolt for high-yield credit spreads, was offered by Dirk Willer, $Citigroup(C.US$ Global Markets's head of global macro strategy. "Any decline in bank reserves is typically a headwind."
Putting a half-trillion or more of bills into the system "might sound terrible, until you realize that there's an extra couple trillion sloshing around out there anyhow, that can't find a home, and that ends up in the Fed overnight," says Robert Tipp, chief investment strategist at PGIM Fixed Income, who is referring to the over $2 trillion in money market assets currently parked at a Fed overnight facility that yields more than 5%.
The impact could be softened depending on how much of the new issuance gets absorbed by money market funds rather than bank reserves.
Source: Bloomberg
Disclaimer: Investing involves risk and the potential to lose principal. Past performance does not guarantee future results. This is for information and illustrative purposes only. It should not be relied on as advice or recommendation.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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