Halister News

(Bloomberg) -- Since the U.S. Treasury is expected to “materially increase” bill issuance, yields could cheapen more than anticipated as government money market funds may begin to shift some of their cash back to T-bills from repo, JPMorgan strategists led by Alex Roever said in Aug. 4 note.

• JPM Treasury strategists estimate 70% of UST funding needs in 4Q, or about $360b, will be in the form of bills, increasing the stock of T-bills outstanding by 20%
• After the 2015 debt ceiling episode, 3-month bills cheapened 7-8bp vs OIS when Treasury increased supply by $280b in the two months following a resolution
• How much the government funds shift this time “remains somewhat of an open question, as it would not only depend on availability of bills but also repo and how it trades relative to bills”
• Since money market funds are one of the biggest buyers of Treasury bills, “changes to their allocation could impact where bills would trade” 
• Money funds’ exposure to Treasury bills has declined by $92b this year to $330b as of June, JPM says, citing Crane Data; bulk of decrease has come from government and agency money funds
• Meanwhile, money funds’ repo exposure increased $122b YTD, as banks -- particularly Canadian, French and Japanese institutions -- shifted their funding to secured from unsecured after money market reforms 
• Repo has also been “economically more attractive” than short-dated bills, providing avg. 3.5bp of pickup in yield over 1-month bills

To contact the reporter on this story: Alexandra Harris in New York at aharris48@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Greg Chang