The U.​S. Treasury released its "Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association May 5." RBC Capital Markets strategist Michael Cloherty explained the minutes, "Treasury is introducing a new cash balance target, where they will always keep on hand enough cash to handle one week of outflows with a minimum target of $​150bn. Note that those outflows are not just Treasury maturities/​interest payments -- because the Tsy cannot prioritize payments, the Tsy will always target enough cash to make all government payments for a week. Tsy says the extra issuance needed to address this will be in bills: specifically the 1m and 3m maturities will get extra attention. This is because bills are very low as a historical percentage of outstanding debt, and that there is a massive increase in bill demand coming as 2a-​7 reform drives cash from Prime money funds to Government money funds. Note that even with the Tsy issuing more, we don'​t think the additional supply will be enough to rebalance supply and demand at the front of the curve -- bills are likely to trade at extremely rich levels due to the structural increase in demand. The elephant in the room around the cash balance policy is the debt ceiling, as the Treasury will be unable to hit its cash balance target whenever it gets close to the ceiling. What this means is that the cash balance swings, and therefore the bill supply swings, will be much, much higher around debt ceiling episodes that they have been in recent years. Since we don'​t expect a large increase in the debt ceiling until 2017 at the earliest, this means more disruptive debt ceiling episodes. And it means that for the next few years there is virtually no tightening effect from the Fed allowing its maturity of Tsys to run off. Fed run-​off would simply mean that an overnight reserve is being removed from the market, and replaced by 1m and 3m bills-- there is very little duration hitting the market from Tsy run-​off. So dont expect a slower tightening path in 2016 due to run-​off." Bloomberg also writes, "U.​S. to Raise Treasury Bill Supply, Hold Bigger Cash Buffer." It says, "The U.​S. will increase the supply of Treasury bills to meet growing demand and raise the amount of cash reserves the government holds to a minimum of $​150 billion in case of a market disruption."

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