Analysts from Morgan Stanley expect nearly half a trillion dollars to leave American banks when the US Treasury goes ahead with a plan to roll out a new batch of T-bills.
Morgan Stanley is expecting $1.364 trillion of net T-bill issuance over the rest of this year, with $1 trillion of that to be issued over the next four months alone, reports CNBC.
The bank says that the new wave of US bonds will likely put significant pressure on banks who can’t compete with the government’s offered yields.
Says analyst Betsy Graseck,
“Our fixed income team sees most of this initial [Treasury General Account] restocking to come from bank reserves, suggesting ~$450b of gross outflows over the next four months.”
US bank stocks have made a notable recovery since the pain felt earlier in the year when the industry weathered the collapse of several large institutions.
According to Graseck, however, the recovery may be short lived if banks now have to deal with a tidal wave of outflows.
“A re-acceleration of deposit outflows would end the current intra-quarter bank stock bounce.”
JPMorgan analysts made a similar call to Morgan Stanley’s earlier this month, but forecasted a slightly lower number of $1.1 trillion in T-bill issuance over the rest of 2023.
Gennadiy Goldberg, a strategist at TD Securities, also recently said,
“Everyone knows the flood is coming… Yields will move higher because of this flood. Treasury bills will cheapen further. And that will put pressure on banks…
The rise in yields could force banks to raise their deposit rates.”
In a recent research note, Morgan Stanley said that despite the US government’s deal to raise the debt ceiling and the stabilization in markets that followed, more volatility could be on its way. The analysts reference 2011, when markets heavily corrected shortly after the government came to a resolution on a debt ceiling crisis.
“Against this backdrop, the relative calm that pervades markets may not be sustainable. Volatility in equity, rates and credit markets appears relatively contained and well below March levels. However, looking back to 2011, markets were also calm before the X-date but subsequently registered sharp moves.
In the three weeks after the resolution, the S&P 500 fell by more than 12%, 10-year Treasury yields declined by 70 basis points (meaning prices for those securities went up) and high-yield bond index spreads widened by more than 160 basis points.”
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