(Bloomberg) — Foreign investors are abandoning short-term Treasury bills, keeping pressure on bond yields higher.
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John Felice, foreign exchange expert and macro strategist at Bank of New York Mellon Corp., writes that the very short part of the US curve — securities that mature in less than a year — is seeing renewed selling, particularly by cross-border investors. In a note to customers, citing the company’s iFlow data. By contrast, he wrote, the returns on long-term securities are high enough that they are beginning to attract money abroad.
“It means that the front end will fall further, as declining demand puts pressure on prices,” he said.
The US Treasury Department has issued nearly $1 trillion in notes since June after the government suspended the debt ceiling. Money market funds — the paper’s largest buyers — took over the stock, using cash parked in the Fed’s reverse repo facility to fund Treasury purchases. However, other investors faced uncertainty about the economy and the course of US central bank policy and piled into short-term debt that yields more than 5%.
While the spread between bond yields and so-called index-night swaps — which investors use to gauge the Fed’s path — is in positive territory for the first time since 2020, it hasn’t been wide enough to entice money funds to continue taking cash out of the RRP. Eligible counterparties continue to store more than $1.8 trillion in central banks.
However, there are signs that money funds are interested in hoarding more treasury bills. The industry has extended the average daily maturity of its holdings to about 25 days, and Velis expects the extension to continue once there is more clarity about central bank policy.
“Once it is recognized that the Fed will not raise rates further and reduce policy uncertainty, combined with continued and escalating billing in the fourth quarter and year-end, there will be enough premium in the billing curve to reduce the suggested retail rate further,” Felice said. .
(Updates the language in the first and second paragraphs; adds a promotion for related coverage at the bottom.)
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