Market Digests $1 Trillion Jump in T-Bill Supply Without Hiccup

The government has issued an eye-watering $1 trillion in Treasury bills since the debt ceiling was suspended in early June. So far, the market hasn’t batted an eye.

For all the concerns about whether the market would be able to take up the supply, investors faced with uncertainty over the economy and the Federal Reserve’s policy path have piled into short-term debt, earning more than 5% yield to mop up the issuance.

Further evidence of a market awash in cash is the relative stability in the Fed’s overnight reverse repo facility. Despite the deluge of issuance, the difference between bill yields and so-called overnight index swaps, which investors use as a proxy for the Fed’s path, is hovering just above zero and discouraging investors from pulling cash out of the overnight facility (RRP). Money-market mutual funds — the largest buyers of T-bills and the primary RRP counterparties — continue to stash more than $1.8 trillion at the central bank, though that’s down from $2.16 trillion at the beginning of June.

“Supply seems to have been digested in an orderly fashion as far as I can tell,” said Zachary Griffiths, senior fixed-income strategist at CreditSights. “We had been saying that the huge wave of bill supply wasn’t going to be a big issue for the market broadly because there is so much cash in the front end ready to be deployed if yields rose much more than ON RRP.”