T-Bill Yields to Climb Further With Foreign Money Steering Clear

Foreign investors are ditching short-dated Treasuries, keeping the pressure on bill yields to climb higher.

(Bloomberg) — Foreign investors are ditching short-dated Treasuries, keeping the pressure on bill yields to climb higher.

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, John Velis, a foreign-exchange and macro strategist at Bank of New York Mellon Corp., wrote in a note to clients, citing the company’s iFlow data. By contrast, yields on longer dated securities are sufficiently high that they’re starting to woo overseas money, he wrote.

“This means that the front end will cheapen further, as waning demand pressures prices,” he said.

The US Treasury has issued roughly $1 trillion of bills since June after the government suspended the debt ceiling. Money-market funds — the largest buyer of the paper — scooped up securities, using cash parked at the Federal Reserve’s reverse repurchase agreement facility to finance T-bill purchases. However, other investors faced with uncertainty over the economy and the US central bank’s policy path have piled into short-term debt that yields more than 5%.  

While the difference between bill yields and so-called overnight index swaps — which investors use to measure the Fed’s path — is in positive territory for the first time since 2020, it hasn’t widened enough to entice money funds to continue moving cash out of the RRP. Eligible counterparties continue to stash more than $1.8 trillion at the central bank. 

Still, there are signs that money funds are interested in accumulating more Treasury bills. The industry has extended its daily average maturity of its holdings to around 25 days, and Velis expects the extension to continue once there’s more clarity around central bank policy.

“Once it’s recognized that the Fed won’t be raising rates further and reducing policy uncertainty, combined with continuous and rising bill issuance into Q4 and year-end, there will be enough premium in the bills curve to reduce RRP further,” Velis said. 

(Updates language in first and second paragraphs; adds tout to related coverage lower down.)

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