US Bill Market Facing Impending Chaos

The US bill market is in a state of panic, and for good reason. It’s caused by a dearth of US treasury bills and is a cause of concern because even a surprise announcement by the US treasury to boost sales could no nothing to drive the bill rates up. Some of the rates have also been turned negative to levels that were seen last during the financial crisis.

Investors are signaling alarm because supply of US bills has reached a low not seen in many decades. JPMorgan Chase & Co. expects a demand of government securities worth $900 billion over the next 18 months. This is likely to put a lot of pressure on the US bill market, valued at $1.4 trillion.

The Chicago based head of US interest rate strategy at JPMorgan, Alex Roever, was quoted as saying, “You have all this money that wants to be in liquid, safe assets that is overwhelming the supply”. The government securities’ supply and demand mismatch is so severe that the rates for four weeks bills have declined to minus 0.0304 percent, which is the lowest since December 2008 on closing basis. The three-month bills yields are also in the negative.

On May 6, the treasury said in its quarterly refunding announcement that it would increase issuance to meet the growing demand. However, that remains as just a signal, as it is not clear how soon more bills would be selling or how much would be auctioned. Seth Carpenter, acting assistant secretary for financial markets, said, “It is clear that demand is large and is growing. We are improving market functioning in the Treasury bill market by increasing the supply.”

Some short-term rates increased after the announcement of the treasury, but not for long. It is not likely that the treasury will start selling immediately, and it is speculated that the amount of bills may drop by $30 billion.

Since the recession and after, when boosted tax receipts and a seven-year low budget deficient signaled a strong US growth, the bills outstanding have decreased by 30 percent. The government, at the same time, shifted to longer term debt and locked the low rates. The amount of bills has decreased to 11 percent of treasuries lengthening the average maturity of US debt outstanding to 69 months.

The money market industry is chaotic, and unless the Fed satisfies the overwhelming demand for bills, it can also undermine its credibility and control.