Thursday, 04 February, 2021
GS-USTs: Refunding, thought on short term rates. Upward IOER adjustment?
GS-USTs: Refunding, thought on short term rates. Upward IOER adjustment?
Treasury’s February refunding announcement was broadly consistent with our expectations in that it left nominal auction sizes unchanged, continued with previously announced gradual TIPS auction increases, and suggested that a new SOFR FRN remains under consideration but is not imminent. As noted previously, we remain of the view that current auction sizes are sufficient to fund a range of fiscal packages.
The main area of difference came in Treasury’s estimated financing needs and cash balance path; the combination implies much sharper bill paydowns than GS had projected. The difference on funding needs is largely due to their assumption of another $1.1tn fiscal package, while Treasury’s projections are based on current law, but also reflect discrepancies in the assumed timing of certain outlays. Treasury’s projections for sharply lower cash balances appear to contain an implicit assumption that the approaching end of debt limit suspension is not addressed well ahead of time.
– If realized, the bill paydowns and cash balance path laid out by Treasury would carry material implications for short-term interest rates. The $1tr or so decline in bills outstanding over the next 5 months could push bill yields 10-15bp through vs OIS, all else equal. A similarly sizable drop in the Treasury’s general account (TGA) would effectively translate to a surge in reserves, increasing the possibility of an upward IOER adjustment on the back of a lower fed funds rate.
– That said, GS believe the Fed is more likely to keep IOER on hold in the near term. A shift in the system-wide demand curve for reserves and potential for some portion of reserves created to end up at the Fed’s RRP facility both suggest that the net impact of the bill and TGA swings may be somewhat more contained than static frameworks would imply. Further, if our deficit assumptions are realized, at a minimum the drawdown in bill supply would be attenuated (and the broader swings could be muted further if the debt limit is addressed).
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