Negative T-Bill Rates Persist as Supply Shortage Seen Worsening

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Rates on one-month Treasury bills are negative for a sixth consecutive day, the longest stretch since the end of 2011, as demand for the safest and most liquid securities surges into quarter end.

Regulations enacted since the global financial to make banks sound and prevent an implosion of the money market mutual fund industry have left less short-term debt instruments, such as bills and repurchase agreements, available. The shift has come while the U.S. Treasury reduces the amount of bills sold in favor of longer-maturity debt as part of plan to lock in lower borrowing costs with interest rates lingering close to historic lows.

“Accounts are just becoming more and more comfortable with the fact that they need to have a supply of bills on hand in order to weather any last minute changes,” said Kenneth Silliman, head of U.S. short-term rates trading in New York at Toronto-Dominion Bank’s TD Securities unit.

The mismatch between supply and demand may worsen if wrangling over the U.S. debt borrowing limit at the end of the year causes the Treasury to have to cut its shortest-maturity debt. If the government drags it feet on dealing with what’s known as the debt ceiling, Treasury could be forced to pay off $200 billion of bills between mid-September and the end of November, according to Wrightson ICAP LLC.

“Late in the year things could get ugly, and there is already a real shortage of bills” and other short-term money market securities,’’ said Michael Cloherty, head of U.S. rates strategy in New York at Royal Bank of Canada’s RBC Capital Markets unit. “You could have extreme stress during that period.”

Debt Ceiling

Treasury has been using extraordinary measures -- effectively, accounting maneuvers -- to keep from breaching the debt ceiling since mid-March. The nonpartisan Congressional Budget Office has projected that the measures used by Treasury may be effective into October or November.

Treasury bills outstanding as a share of the government’s total marketable debt is about 11 percent, a multi-decade low, and down from a high of 34 percent in December 2008.

On the demand side, regulations on U.S. money market mutual funds have heightened demand for bills and repo. While reforms in recent years pushing over-the-counter derivatives to exchanges has also boosted need for such collateral to use in posting margin for such deals.

“Debt-ceiling constraints could lead to a massive pay-down in the bill sector over the final four months of this year,” wrote Lou Crandall, chief economist at Wrightson ICAP in Jersey City, New Jersey, in a note Monday. “The net redemption would come at a time when the migration of money fund assets from prime to government-only funds is likely to be accelerating, which would make the bill squeeze even more severe.”

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