BNY's Velis on T-Bills, Money Markets
BNY's John Velis and David Tam write on "Increasing T-Bill Issuance and Money Markets" in their latest "Short Thoughts." They tell us, "Increased T-bill supply for coming months has been identified as a driver for higher SOFR rates going forward, but we think there's a mitigating factor if the market continues to price out the most hawkish of expectations for the FOMC for the rest of 2026.... [T]he 3m term SOFR spread of the 3m T-bill rate has nearly halved since the post-June FOMC pop in hawkish pricing. We think that moderation in the labor data and short-term relief in consumer prices can keep these spreads from widening much further. Net bill issuance between July and September has averaged nearly $500bn over the past three years, while issuance in the April to June period has been negative by about $90bn.... [I]t's likely that Treasury's borrowing needs will require additional boosts to bill auctions over the next several months." The piece asks, "Will this push SOFR rates even higher, as many have argued? As mentioned above, we think that Fed expectations could soften.... The real question over the next few months, as expected T-bill issuance increases, is whether or not it can be comfortably absorbed by the market. There has been some reluctance by money market mutual funds (MMFs) to move out the curve and increase weighted average maturity, given still-present expectations of a rate hike, and this might have impacted demand for recent auctions. BNY adds, "However, with MMFs continuing to post record AUMs and cash preferences, we don't think the expected ramp up in supply will have too much trouble finding buys, especially if Fed rate expectations come in lower – a data driven process we'll be watching.... [R]eal money demand for T-bills is nearly inelastic, a robust result that held before, during and after the pandemic. We would be wary that any spread widening will be long-lived and expect the market to absorb increased supply."
