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With President Joe Biden and House Speaker Kevin McCarthy reaching a tentative deal on the borrowing limit, the bond market's concerns seem to have shifted from the possibility of default to the deluge of Treasury Bills expected to hit the market, impacting short-term borrowing rates.
The Treasury Department is expected to soon replenish its coffers by selling more than $1 trillion of bonds through the end of the third quarter, reported Bloomberg. With such a massive supply of paper hitting the market and with yields already trending on the higher side due to the Federal Reserve's aggressive monetary policy, short-term yields are likely to shoot up significantly in the coming days.
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This would also have an impact on households. As Treasury competes with banks for cash, the lenders may see their short-term funding rates increase. This may force them to increase their lending rates to households and businesses, the Bloomberg report said.
Interestingly, Bank of America Corp. analysts have forecasted it would have the same economic impact as a 25 basis points interest rate hike, according to the report.
The iShares 1-3 Year Treasury Bond ETF (NASDAQ:SHY) lost 0.43% while the Vanguard Short-Term Treasury Index Fund ETF (NASDAQ:VGSH) lost 0.48% over the last five days, according to Benzinga Pro.
Expert Take: Kevin Flanagan, head of fixed income strategy at Wisdomtree Investments told Bloomberg there will be a knee-jerk reaction in T-bills as that area of the market has borne the burden of uncertainty. "So yields come down from their highs, but because the Treasury will increase issuance, there is a floor in yields for that market," he said.
The U.S. cash stockpile, or the Treasury General Account, will surge to $550 billion as of the end of June and reach $600 billion three months later, the report said citing the department's estimates at the beginning of the month.
According to Efrain Tejeda, a short-term interest rate strategist at Morgan Stanley, T-bill issuance will amount to $730 billion over the next three months and about $1.25 trillion over June through December, the report said.
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