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Investors are awaiting a flood of short-term debt issuance from the U.S. government after President Donald Trump signed off on a $2.2 trillion rescue stimulus package to soften the blow from the COVID-19 pandemic.
Much of the borrowing used to finance the stimulus measures is expected to come from the Treasury bills market, debt with maturities of a year or less, with some analysts anticipating more than $2 trillion of bill issuance in 2020.
The increased supply of bills could help satisfy the intense demand for cash that has helped push rates for some shorter-dated Treasurys turned negative in recent weeks, and serve as a test of market’s willingness to entertain the U.S.’s ballooning budget deficits.
“Essentially, the shortage in bills is quickly replaced by a deluge,” said Steven Ricchiuto, chief financial economist for Mizuho Securities.
The ramp-up in bill sales may run counter to calls for the Treasury Department to take advantage of the low level of long-term borrowing costs.
“The market has easily absorbed issuance in the last few days, this is absolutely the best time to use incredibly low interest rates to issue longer-term debt,” said Anwiti Bahuguna, head of multi-asset strategy at Columbia Threadneedle, in an interview.
But Ricchiuto said the U.S. government will still plan to increase the auction sizes for longer-dated bonds. The process, however, is likely to be a gradual shift in keeping with the Treasury Department’s mantra of keeping debt issuance “regular and predictable.” In the interim, the bills market will have to take up the slack in the coming weeks and months.
In the last past three days, sales for short-term Treasury bills have already run close to $280 billion.
And research by JP Morgan shows analysts at the bank expect the Treasury Department will sell $2.4 trillion of short-term bills this year, with maturities of a year and less.
See: Trillions in coronavirus spending could explode deficits to World War II levels
Before the coronavirus outbreak, the U.S. was already headed for annual trillion dollar fiscal deficits, but the recent stimulus package will accelerate the climb in government debt levels.
A new study by Morgan Stanley estimates the deficit will total at least $3.7 trillion in calender year 2020 and an additional $3 trillion in calendar year 2021. That suggests nearly $5 trillion in extra deficit spending in the next two years, financed by the sale of Treasurys.
Investors remain mixed on the overall impact of increased debt supply on broader bond-market trading.
On one hand, the increased issuance could overwhelm demand for bond prices as investors have to take down more securities at the Treasury Department’s auctions.
But the intense need for cash and other securities that are likely to hold up in value has more than compensated for any concerns that so-called bond vigilantes will make a comeback and punish the U.S. government’s fiscal profligacy.
The expected inflation rate over the next decade implied by Treasury inflation-protected securities stood at 0.90%, well below the Federal Reserve’s target of 2%, according to Tradeweb data.
Indeed, the yields for the one-month and three-month Treasury bill TMUBMUSD03M, -22.90% briefly turned negative last week as investors prized the relative liquidity of the short-term debt and its government backing in a marketplace that saw all corners of financial markets assailed by selling in the past few weeks.
Government money market funds that invest in T-bills brought in $318 billion of cash last week, based on Lipper data.
In markets, the S&P 500 SPX, -4.29% and Dow Jones Industrial Average DJIA, -4.09% is trading lower by more than 3%. The 10-year Treasury note yield TMUBMUSD10Y, -8.02% fell 10 basis points to 0.60% on Wednesday.
Read: Dow slides more than 700 points as Trump’s warning on coronavirus puts investors on edge
