Interest rates in the U.S. dollar-funding markets are pinned right near zero — and the pressure that's holding them down may only intensify because of tax season and President Joe Biden's rescue plan.
The shortage of Treasury bills is expected to worsen even before the debt ceiling returns in July, which will force the federal government to continue cutting its cash pile by hundreds of billions of dollars.
Yet the scale of those cuts — which could further slow issuance of already scarce Treasury bills — faces other elements of uncertainty.
The Biden administration has been spending the $1.9 trillion of rescue plan at a slower-than-expected pace, which could leave the Treasury's cash balance even larger when the debt limit comes back. The income-tax filing deadline also adds a wildcard, with the possibility that collections could surpass estimates on the back of last year's stock-market surge and the economic recovery as receipts arrive through June.
Taken together, they're likely to leave the market anticipating a dearth of short-term Treasuries just as money continues to plow into that corner of the fixed-income market.
"I think we continue to see this rate environment at least through September or so and potentially quite a bit longer," said Jefferies economist Thomas Simons.
The rate on overnight general-collateral repurchase agreements remain cemented at zero, while yields on Treasury bills maturing in three months or less range from negative 0.013% to positive 0.015%. The pressure on secured rates spilled over to unsecured benchmarks as the three-month London interbank offered rate for dollars slid the most in seven weeks Wednesday to a new record low, dropping almost 1.1 basis points to 0.17288%, the largest one-day decline since March 4.
Under current law, the Treasury's cash balance must return to about $130 billion by July 30, the level where it was when the borrowing limit was suspended.
So any excess of tax returns or a slower pace of spending could make the required cutbacks even deeper. With the COVID-19 relief funds being released slower than anticipated, the Treasury had $1.21 trillion in its account at the Fed at the end of the first quarter. That's about $300 billion more than it initially estimated.
It's possible that Congress could step in to pass new debt-ceiling legislation or extend the suspension, which could ease the expected shortage of Treasury bills in the months ahead.
But assuming there is no further change in the size of longer-dated debt sales, Wrightson ICAP on Monday estimated that Treasury would have to pay down almost another $390 billion of bills between now and July 30 to reach its cash balance objective of about $130 billion. With the $346 billion that's already been paid down since the beginning of the year, that means a shrinkage of about 16% in the size of the total bills market.