US taps market for stimulus funds at historically low rates

The US Treasury department issued a record amount of short-dated debt this week as it began to fund the federal government’s record economic stimulus package at historically low interest rates. 

The Treasury flooded the market with $319bn of Treasury bills, which mature in one year or less, far surpassing the previous record of $190bn seen in October 2008.

The jump in issuance came roughly one week after President Donald Trump signed a $2tn relief programme into law aimed at bolstering the economy from the damage inflicted by the coronavirus outbreak. 

In order to fund portions of the stimulus package that require immediate financing — like direct cheques to households and increasing unemployment benefits — analysts at TD Securities said they expect the Treasury to raise $700bn over the next few months. The department would likely rely most heavily on the bills market to raise the necessary cash, the analysts said.

“Bills are the most flexible issuance instrument in the Treasury’s arsenal and are currently benefiting from a surge in safe-haven demand,” the analysts wrote in a recent report.

As investors have sold risky assets due to fear over the costs of the pandemic, money market funds, which invest in safe, short-term government debt, have seen robust inflows.

The resulting demand from these funds for Treasury bills helped to push yields on certain bills below zero at one point late last month, and while they have risen marginally this week as a result of the deluge in supply, they still remain extremely low.

On Thursday, the Treasury was able to auction off $80bn of one-month bills at a yield of 0.09 per cent.

“The market digested the bill issuance perfectly fine,” said Jon Hill, a rates strategist at BMO Capital Markets. “The big benefit was that there was already an imbalance . . . too much cash chasing too few securities.”

Mr Hill said this imbalance was exacerbated by the fact that the Federal Reserve had snapped up roughly $1tn of Treasuries since mid-March, removing a lot of supply from the system. The Fed announced last month it would buy an unlimited quantity of Treasuries in order to alleviate strains that had emerged in the market.

Beyond increasing its issuance of bills, the Treasury department also announced on Thursday it would raise the size of its monthly auctions for three-year, 10-year and 30-year notes, which are set to take place next week. 

Analysts at JPMorgan originally projected such increases would not occur until next month. “The sheer size of the funding needs coming from the passage of the [stimulus bill] is forcing the Treasury to take more aggressive steps,” they said.

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