JPM: Scarce T-Bills, Lower Yields
J.P. Morgan Securities' most recent weekly "Short-Term Market Outlook and Strategy" contains a "Treasury bill holders update," which tells us, "Last year's surge in net T-bill issuance prompted a dramatic change to the investor composition of the market.... In years past, MMFs have often taken on the role of shock absorbers for T-bills, and last year was no different. However, the degree to which they took on T-bills was substantial, fueled by the growth in AUM as well as needs for liquidity." The brief continues, "Indeed, MMFs' allocation to T-bills increased by $1.38tn in 2020, effectively taking down over half of the $2.6tn additional T-bill supply, capping off a year that saw the largest annual increase on record. Of that amount, $367bn came from Treasury only funds, $889bn from government and agency funds, and $129bn from prime funds. As a result, MMFs now make up 41% of the market versus 28% at the start of the year." JPM explains, "In contrast, foreign investors (such as foreign official institutions, foreign banks, and offshore asset managers), who historically represented a large chunk of the T-bills market, have effectively been crowded out given their holdings only grew $321bn last year. They now make up 21% of the market, down from 29% at year-end 2019. The combination of the Fed, state and local governments, dealers, as well as corporations make up the remainder." They add, "The shift in T-bill investor composition underscores what is likely an intense period for MMFs in the coming weeks. With Treasury expected to reduce their net T-bill issuance next week (down ~$100bn) and limited alternative money market supply, this will likely exert significant downward pressure on T-bill yields and drag other money market rates down as well. Not helping matters is the still significantly elevated of MMF AUMs. Per Crane Data, there's $1.1tn in Treasury MMFs, $2.6tn in Government & Agency MMFs, and $921bn in Prime MMFs. In the absence of alternatives, MMFs will likely have to resort to the Fed ON RRP and as such, we would not be surprised if this facility gains more use. However, over the medium term ... the outlook looks less threatening assuming Congress passes another stimulus package, presumably in the $1.7tn ballpark sometime in March. All else equal, this should significantly boost T-bill supply in 2Q and alleviate some of the pressures confronting MMFs currently."
