A little more than a month ago, the U.S. Treasury Department projected a sharp drop in net debt this quarter, against which a record $1.1 trillion in cash and reserves would flow into the market. And now, influenced by Biden‘s latest stimulus bill, the flood of liquidity has officially begun. The latest daily statement from the U.S. Treasury shows that the Treasury’s general account (TGA) at the Fed plummeted from $1.361 trillion to $1.090 trillion on March 17, the lowest value since April 2020.
That’s the equivalent of injecting $271 billion in cash into the market in one day!
As the Treasury cut TGA account balances, depository institutions took in a surge of cash, increasing by $220 billion to a record high of $3.873 trillion in the past week.
It is important to note that once a large amount of liquidity is injected into the financial system in the form of cash and savings, a surge in people’s savings can trigger a domino effect in all types of assets, which in turn may cause financing rates such as FRA-OIS and repo rates to fall into negative territory. To be sure, this is currently happening. The U.S. Treasury and government-sponsored enterprises are injecting large amounts of money into the market each month, causing overnight reverse repo rates to fall into negative territory.
The DTCC GCF index, which tracks daily rates in the general collateralized financial repurchase agreement market, shows this key short-term rate falling to -0.008%, which financial blog Zerohedge says is the lowest level on record.
JPMorgan Chase warned in its fourth-quarter earnings report that people’s massive deposits could further depress rates.
Meanwhile, the yield on U.S. Treasuries maturing in mid-April will be between -0.015% and 0%.
But U.S. Treasuries remain highly sought-after as collateral. Although the yield to maturity on four-cycle Treasury bills issued last Friday has been close to zero, direct bidders were allocated the highest percentage in seven years, indicating that investors expect it may be more difficult to find short-term assets with positive yields.
The Treasury’s sale of $40 billion of four-cycle Treasury securities yielded 0.05%, the lowest since March 26 of last year. Direct bidders were matched at 21%, the highest since February 2014, with Thomas Simons, an economist at Jefferies, saying.
“It is unclear why bidders who regularly attend auctions want to buy four-period Treasury bills that yield just five basis points, possibly because short-term assets that offer positive yields are becoming harder to find.”
This means negative rates will continue to go lower. Credit Suisse analyst Zoltan Pozsar also predicts that banks will likely be forced to tighten their balance sheets as the Supplemental Leverage Ratio (SLR) waiver will not be extended.
Another point to note is the Federal Reserve’s reverse repo operations. Lou Crandall, an economist at Leighton Bond Market Research (Wringhtson ICAP), said the Treasury is continuing to cut TGA accounts, allowing large amounts of cash to flow into the financial system, while the Fed is expanding its asset purchases, so some of that cash may flow into reverse repurchase agreements rather than flowing into bank reserves.
Finally, it is worth noting that earlier on Saturday, the Fed announced that the SLRs due to expire at the end of this month will not be extended. As a result, long-term U.S. Treasury yields rose and long-term swap spreads widened.
Zero Hedge concludes that for now, the SLR announcement did not have any huge impact, but keep a close eye on negative short-term rates. As the U.S. Treasury continues to inject hundreds of billions of dollars of liquidity into the financial system in the coming weeks, negative rates could continue to move to deeper levels.
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