Thoughts on the USD liquidity picture and the FOMC

It’s been two weeks since the Tbill issuance started, and we now have a better look at how some of the dynamics of heavy issuance are affecting the market.

The Treasury General Account (TGA) has increased by $210b, based on the Jun 15 TGA statement. This increase represents the net issuance (total debt issuance - maturing debt) since the debt ceiling was lifted.

The balance at the reverse repo facility (RRP - where a lot of money market funds get their yield) has decreased by $120b. The increased supply of issuance has resulted in Tbills gaining a yield premium over the reverse repo facility, incentivizing capital to flow out of RRP into Tbills. It’s likely that tax payments on Jun 15 were largely funded out of the RRP as well. The main debate around this coming Tbill issuance was how much of it would be funded by bank reserves (draining liquidity) vs funded by capital in the RRP. My guess is that short term bills (<2 months) are drawing some funds out of the RRP while longer term bills and notes are not.

Reverse repo facility

As a result of the above, net liquidity has dropped by $200b over the last two weeks.

Net liquidity

What’s been most surprising to me has been the outsized price impact of the issuance. Despite a weak ISM services print on Jun 5 (50.3 vs 52.4 expected, with all components falling), higher-than-expected jobless claims for two consecutive weeks, a China slowdown, depressed energy prices, and a CPI print last night mostly in line with expectations, every rally in Treasuries has been sold and yields have been grinding higher.

Wed was a particularly violent selloff, with a spike higher on CPI reversing into a sharp selloff going into the Treasury auctions. This was followed by another sharp selloff today after the Fed raised its 2023 dots to 5.6%, higher than expected. The hawkish Fed was a game changer for this market as it unanchored hiking expectations and opens up downside volatility in the Treasury market. More to come in the paid subscriber section.