U.S. bill rates risk turning negative, but stimulus could change course

Band Karen Brettell

February 23 (Reuters)Short-term U.S. Treasury debt yields risk turning negative as U.S. government curbs treasury bill sales, but analysts are looking at the progress of the stimulus bill to assess whether lower yields could be a problem. temporary problem.

Bill yields last turned negative in March 2020 amid market turmoil caused by the spread of the pandemic in the United States. If lending rates drop too much, it could disrupt major funding markets and hurt the nearly $ 5,000 billion money market fund industry, making funds reluctant to accept new investments.

The US Treasury Department, reducing its cash balance after amassing cash to pay for the delayed fiscal stimulus, said earlier this month it plans to reduce its cash balance to $ 500 billion. dollars in June, up from $ 1.7 trillion at the end of the year. This could push bills – US government debt issues with maturities of one year or less – into negative territory.

But these projections do not take into account new budget spending, and if the Biden administration passes a larger-than-expected bill, which requires a lot of money quickly, then the reductions in billing – and possible negative returns – may not to last. .

“If we get a big package, call it next month, then the supply of bills will have to increase at least in the short term,” said Zachary Griffiths, macro strategist at Wells Fargo in Charlotte.

“The Treasury still has a huge cash balance to rely on, but it will also need to keep the supply of bills positive in the short term to help fund this and smooth things over from a supply side.” , did he declare.

The U.S. House of Representatives Budget Committee on Monday approved legislation with $ 1.9 trillion in new coronavirus relief, advancing President Joe Biden’s top priority. The entire House, which has a slim Democratic majority, hopes to pass the bill later this week.

One-month, three-month and six-month yields were 2 to 5 basis points on TTuesday US1MT = RR, US3MT = RR, US6MT = RR.

If yields turn negative for a long time, the Federal Reserve may need to step in and increase the interest it pays on excess reserves (IOER), Griffiths said.

The Fed has relied on adjustments to the IOER, which is what it pays banks for reserve balances, and to the rates on its overnight repo facility to keep the rate going. of federal funds within its target band. It is currently zero to 25 basis points.

Raising these rates can draw more liquidity into other credit markets and ease downward pressure on short-term rates.

The Treasury cannot sell bonds at negative rates, but they have traded in negative territory in secondary markets in times of stress and when demand for safe assets has exceeded supply.

Blake Gwinn, rate strategist at NatWest Markets, said the Fed likely won’t act on negative bill rates unless they persist for a long time.

A greater risk, he said, is that if the federal funds rate USONFFE =, which was 7 basis points on MOne day, dips below the 5 basis point area, which would likely prompt the Fed to act.

The federal funds market is dominated by government sponsored companies (GSEs) such as Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System. If that rate drops to 2-3 basis points, they might prefer to park money with the Fed, which would leave the market very illiquid and prone to large swings in lending rates, Gwinn said.

Fed Chairman Jerome Powell said on Tuesday that the U.S. central bank has tools to keep the federal funds rate within its target range, which is the primary goal. He added that these tools should limit the extent to which invoice yields continue to fall or become negative.

Any hike in the IOER would be a technical adjustment and not indicate a move away from the Fed’s commitment to floor rates for some time.

The probability thats off Fed rIOER aids may also depend on the monthly investment models of GSEs, which each month temporarily store the principal and interest of mortgage-backed securities (MBS) in repo, before withdrawing them to pay the owners of the MBS.

This temporarily lowers the repo rate, which in turn can lower federal funds.

Overnight pension rate USONRP = fell to zero on Thursday, and was five basis points on TTuesday.

Chart – Treasury Bill Yieldshttps://tmsnrt.rs/2NQjdXo

Graphic-Fed funds and pension rateshttps://tmsnrt.rs/3kjR1Zh

(Reporting by Karen Brettell in New York Editing by Megan Davies, Dan Burns, Matthew Lewis and Jonathan Oatis)

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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