The $1.5 trillion market for U.S. Treasury bills, known as an oasis of stability for investors worldwide, is experiencing the most volatility since the financial crisis.
Daily swings in the government’s shortest-maturity obligations are widening as debate over the Federal Reserve’s path collides with rising demand for the securities before the implementation of regulations intended to make money-market funds safer.
The gyrations underscore how it’s a precarious time for investors in bills and other instruments in the money market, which the Fed uses to implement policy changes. Asset managers looking to park cash in the short-term securities have to navigate officials’ efforts to normalize interest rates while also adapting to post-crisis rules.
Skepticism toward the Fed’s plans to boost its overnight target, following liftoff from near zero in December, is fueling the volatility. Futures assign a 2% chance of an increase at officials’ June 14-15 gathering, and the probability doesn’t exceed a coin toss until December.
“The Fed has hiked once already, so we are in a tightening cycle, but there is enough uncertainty about what that will look like,” said William Marshall, an interest-rate strategist in New York at Credit Suisse Group AG, one of the Fed’s 23 primary dealers. “The other big uncertainty, where there is still a lot of debate, is what is going to be the end state for front-end demand once the money-fund reforms go into effect.”