For all the anxiety over the global selloff in bonds, the big worry in money markets is the havoc being created by a dearth of U.S. Treasury bills.
The magnitude of the problem was on display last week, when not even the Treasury Department’s surprise announcement to boost sales could do much to lift bill rates. Over the past two weeks, some of those rates have turned negative, reaching levels last seen during the financial crisis.
With supply at multi-decade lows, investors are signaling alarm as regulations intended to shore up banks and prevent a run on money-market funds exacerbate the bill shortfall. JPMorgan Chase & Co. expects an extra $900 billion of demand for government securities during the next 18 months, putting pressure on a sizable chunk of the $1.4 trillion bill market.
“You have all this money that wants to be in liquid, safe assets that is overwhelming the supply,” said Alex Roever, the Chicago-based head of U.S. interest-rate strategy at JPMorgan.
The consequences extend well beyond the fixed-income market as depressed rates in the $2.5 trillion money-market fund industry stand to deprive savers of income long after the Federal Reserve starts raising interest rates.
The mismatch between supply and demand has been so acute that four-week bill rates fell to minus 0.0304 percent on April 29, the lowest on a closing basis since December 2008. Yields on three-month bills also turned negative. The Treasury responded by saying at its quarterly refunding announcement on May 6 it would increase issuance to meet growing demand.
It didn’t provide any details on how soon it would start selling more bills or much it would auction.
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