Halister News

(Bloomberg) -- T-bill market may face a “much larger” supply squeeze amid regulatory-driven increase in govt money market assets and Treasury’s need to shrink its operating cash balance before the debt ceiling is reinstated March 15, BofAML strategist Mark Cabana said in note.

• May be $800b-$1t more in govt fund assets in relation to sharp Treasury cash balance reductions of 2015
• Also, Treasury will have est. $390b cash balance at end-2016, though possible it’s going to need to “decline rapidly” before debt limit
• Current legislation states Treasury can’t increase cash level above “normal operating balances” in anticipation of debt limit, which in the past has been interpreted as balance level when debt limit was extended
  • NOTE: Balance was ~$30b when debt limit became binding in March 2015 and recent debt ceiling resolution was passed in Oct. 2015
  • May cause Treasury to reduce balance by up to $360b during 1Q
• Reduction in cash balance could result in “substantial richening across the bill curve”
• Few scenarios may limit extent of bill paydown, though they are very unlikely
  • Treasury may not “aggressively” increase 4Q cash balance level in order to avoid large drawdown in 1Q 2017, which would risk a “more pronounced richening” of bills around money market deadline
  • Treasury could make argument to Congress that “normal operating” level of cash balance is closer to $150b minimum established in May 2015
  • Congress makes any potential passage of debt limit “relatively easy” and “unlikely to require the typical political posturing or accounting maneuvers”