(Bloomberg) -- While demand for Treasury bills stayed strong in the past week, some traditional buyers such as money market mutual funds may prefer the Federal Reserve as their primary parking place for cash.
Sales of short-term US government paper in the secondary market increased every day last week, John Velis, a foreign-exchange and macro strategist at Bank of New York Mellon Corp. wrote in a note to clients, citing the company’s iFlow data. Shrinking primary dealer holdings of T-bills suggest they’ve been finding buyers for T-bills at higher yields as the US increased the size of debt auctions to refill coffers depleted by the debt limit-increase standoff.
Warren Buffett even signaled that Berkshire Hathaway will continue buying T-bills, despite a downgrade of the US rating by Fitch Ratings and amid volatility in long-term Treasury yields.
But a big buyer of Treasury bills — money-market funds — may be slowing its shift out of the Fed’s overnight reverse repurchase agreement facility, where eligible counterparties can earn 5.3% on their money, according to Velis of BONY.
Overall demand for short Treasuries has shrunk the gap between three-month bill yields and overnight index swaps to just above zero. It was as wide as 7 basis points a month ago.
“Bills have been cheapening – and offer yields above the 5.3% RRP rate across the curve – but apparently not by enough to induce another large wave out of RRP,” Velis said.
Wall Street strategists anticipated a deluge of Treasury issuance would drive yields on short-term instruments from bills to repo higher, spurring some funds to shift cash away from the Fed. With net issuance of T-bills expected to total $1.9 trillion by the end of 2023, the speculation is that this next wave will continue to drive money out of the Fed’s facility.
Until the middle of July, usage of the so-called RRP had declined by about $443 billion, bottoming at $1.716 trillion on July 18, as money funds were eager to extend out the bill curve. Since then, however, balances at the central bank’s facility have grown by more than $90 billion to $1.811 trillion as of Aug. 7.
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