— ‘Year-End Financing Rates Are Expected to be Volatile Again’
–Changes In T-Bill Issuance May Not Wait Until Next Refunding
By Denny Gulino
THE TSY DEPT (MaceNews) – The Federal Reserve’s $60 billion-a-month T-bill purchase program intended to stabilize the money markets and prevent liquidity crunches may not prevent more unwelcome volatility at the end of the year, a bond market industry group warns, and Treasury officials Wednesday acknowledged they may need to increase the supply – but not yet.
While promising “ample warning,” Treasury officials in a morning news conference acknowledged that they may have to boost T-Bill supply before the next quarterly refinancing announcement.
Asked by Mace News why the change is not being made immediately, given the intent of the Fed and Treasury to prevent more disruption in the crucial money market plumbing that is vital to its functioning and to transmission of monetary policy to the economy, they answered it is “premature” given the full effect of the Fed’s T-Bill purchases has not had time to be fully analyzed.
“That bill purchase program has only just begun,” Brian Smith, Deputy Assistant Secretary for Federal Finance, answered. “There is significant uncertainty about the timing, duration, even the securities that might eventually will be purchased as part of that program.”
He continued, “We think it’s premature to draw any conclusions or make any changes to Treasury issuance and accordingly we have announced no changes today.”
Asked for some idea of the timing of any changes, Smith said, “We try as much as possible to provide notice ahead of time of our financing decisions especially in the coupon and other non-bill securities. That’s why we lay out these expectations in the quarterly refunding statement.
“That said,“ he continued, “if things that happen that are unexpected or significant we don’t formally announce the auctions until each of the particular dates so we reserve the right to make changes if necessary.”
Among the documents made public Wednesday along with details of the Treasury Department’s quarterly financing was the report containing the warning from the bond market group, made up of top-tier executives of the securities firms that do most of the initial trading in Treasury securities.
“Based on current fiscal projections,” the group told Treasury, “and coupled with the Federal Reserve’s recently announced T-Bill purchases, it is possible that scarcity could develop in the T-Bill market if Treasury maintains its current coupon issuance sizes.”
It went on, “Barring any change in issuance pattern, the Committee would expect to see a greater divergence in money market rates across T-Bills, commercial paper, fed funds, SOFR and term repo rates.”
In addition to trying to boost bank reserves through bill purchases, the Fed is conducting daily repo operations, a Band Aid for repurchase agreements it would prefer not to be necessary if there were adequate reserves in the system.
Most significantly, the bond industry veterans said, “Year-end financing rates are expected to be volatile again owing to regulatory capital constraints primarily on the global systemically-important banks known as “G-SIBS.”
In fact, in making its quarterly refinancing details public, Treasury ,did say that for now it is sticking with the current issuance schedule so that the historical pattern is expected to prevail. Since August the pattern has increased the amount of T-Bill issuance by $235 billion. The bill supply, according to the usual seasonal pattern, “is expected to gradually increase through the end of November before declining into year-end.”
By the end of the year, “the supply of bills is expected to be comparable to current levels, and then remain fairly level during the month of January.”
Still the top bond industry veterans warned this won’t be enough. Known as the Treasury Department Borrowing Advisory Committee or “T-BAC,” the group echoed the warnings that have been issued ever since the Fed announced its urgent reaction to the difficulty it was having in keeping its fed funds rate within the boundaries dictated by the Federal Open Market Committee.
The fed funds rate is the principal tool the Fed is using to transmit its policy of diminishing accommodation to the economy and when it showed spasms of elevation to double digits instead of the policy rate, now between 1.75% and 2.0%, there was immediate concern that the Fed had lost control.
In addition, were there to be other problems in the money markets, such a squeeze on liquidity could mean the necessary institutional adjustments would be hampered, perhaps frozen, as counterparties refused to make themselves available if banks and other institutions needed to sell a portion of their Treasury securities.
The Federal Open Market Committee is expected, by one measure by 99.5% of market participants, to cut another quarter point from that policy rate in the afternoon policy meeting. Fed Chairman Jerome Powell is expected to repeat his characterization of the problem as a technical glitch required the Fed to raise the level of reserves to the level adequate to preventing the liquidity squeezes.
He has insisted the “organic growth” of the balance sheet is in no way a resumption of quantitative easing given the Fed purchases are only of short-term securities in a fairly limited amount of $60 billion a month.
As the Treasury Borrowing Advisory Group warning shows, however, the Fed’s bill buying program depends for its success on Treasury accommodating the purchases and that broadening of bill issuance is still to come.