Money market funds are reportedly gearing up for a big wave of new Treasuries to hit the market as the US government looks to stock up on cash.
Over a trillion dollars worth of T-bills are expected to be issued in the next one to one and a half years as the Treasury positions itself to address a massive fiscal deficit, Reuters reports.
On the demand side, money market funds reached a record $7.4 trillion in assets last month as investors looked to lock in higher returns before a potential rate cut from the Federal Reserve later this year or next year.
As Deborah Cunningham, CIO for global liquidity markets at Federated Hermes told Bloomberg,
“Five-percent-plus rates were nirvana, four-percent-plus is still very good — and if we dip down into the high threes, that’s quite acceptable as well.”
According to Reuters, J.P. Morgan Chase, Barclays, and TD Securities have estimated new issuance of T-bills to hit somewhere between $900 billion and $1.6 trillion over the next 18 months, a jump in forecast after the recent debt ceiling resolution.
However, in a new CNBC Television interview, ex-Bridgewater Associates chief investment strategist Rebecca Patterson warned that the market for US debt will soon hit a rough spot.
“I think there are three main things driving the dollar [devaluation]. One is slightly lower frontend rates, interest rates over this period because currencies trade on rate differentials.
But I think more importantly and what’s different this time is that you’re seeing both re-allocation out of the US both by Americans diversifying and foreigners pulling back slightly. And then third and really importantly is hedging. So let’s say I’m a large overseas pension fund, and I have a tech equity exposure, and I want to keep it because I believe in the structural story, but I’m nervous about the dollar, I’m nervous about the Fed’s independence, I can hedge out that currency risk.
So even if money stays in US equities, which helps explain where we are today, you can still see that dollar weakness.”
Susan Hill, senior portfolio manager and head of the government liquidity group at Federated Hermes, said that while the expected T-bill issuance appears large, the firm welcomes it and “feel that we will have no trouble accommodating it.”
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