Next week's debt bonanza will test markets

Yesterday's 4-week T-bill sale might have been an early "liquidity crack" signal

This week's 3-, 4- and 6-month T-bills saw solid demand with high bid-to-cover ratios and impressive indirect demand.

However, yesterday's 4-week T-Bill auction was surprisingly poorly subscribed. With a bid-to-cover of 2.49x, indirect bidders were at 39%, the lowest since May 2022. The auction tailed by 4.5bps clearing at 5.09% in yield. On the contrary, the 8-week T-bills issued on the same day received better demand, and the auction was able to stop through by 0.5bps, clearing at 5.12%.

The dissonance between earlier T-bills auctions this week and the ones of yesterday might lie within the yield that was offered. The 3-, 4- and 6-month T-bills were cleared with a high yield rate of 5.22%, 5.2%, and 5.25%, respectively. Yesterday’s 4- and 8-week auctions were cleared at 5.09% and 5.12%, respectively. Is it a coincidence that the T-Bill with the lowest yield has the poorest demand? It might, but it might eerily not.

Money market funds (MMFs) are paid 5.05% at the Reverse Repurchase Facility (RRP), while Bank Reserves at the Fed receive 5.15%. The only way that cash tight at both facilities is willing to buy T-bills is if they pay a higher yield than what the Fed offers. The fact that the auctions that offered more or close to 5.15% were better participated than those that offered a sensibly lower yield might indicate insufficient demand from MMFs to support debt issuance. Thus, bank reserves might be buying the bills.

We know that if MMFs at the Fed buy the bills, it won't be a problem for markets. If bank reserves buy the same, it might be a problem for Fed as another deposit flight could ensue.

Now, we cannot be sure of the above. Hence we will be closely watching next week's developments in the market as the Treasury ramps up T-bills sales trying to understand whether such a risk materializes.

The US Treasury will sell $296 billion of debt in just two days

Yesterday the Treasury announced next week’s debt sale volumes. Coupon sizes at next week's auctions are unchanged. Only the 52-week T-bill has been upped by $2 billion to $38 billion. The new 6-week bill size is chunky at $45 billion. Between Monday and Tuesday, the Treasury plans to sell almost $300 billion in debt in two days. Yet, it must confirm the sizes for the auctions on Wednesday and Thursday.

We will closely monitor next week's auctions to understand whether the liquidity drain might be a catalyst for something bigger in markets.