© Reuters.

(Bloomberg) — For all the cash sloshing around in the financial system, many investors have been reluctant to scoop up Treasury bills in recent offerings.

That apathy stems from uncertainty surrounding the so-called X-date, when the Treasury is set to exhaust its borrowing authority under the debt ceiling. There’s also a perceived degree of confusion from the department on matters of supply, and the fact that investors are parking a record $1.087 trillion of cash overnight at the Federal Reserve’s reverse-repurchase facility to earn a slightly higher yield.

Read: Fed Reverse-Repo Facility Usage Jumps to Record $1.087 Trillion

The Treasury on Thursday sold $40 billion of four-week bills at 0.045% and $35 billion of eight-week securities at 0.055%. Both auctions generated average demand compared to recent weeks, according to Jefferies (NYSE:) — especially in light of the department’s unexpected move to shrink some bill auctions, announced before Thursday’s sales.

“The announcement placed some focus on October 15 as a potential date where Treasury is concerned about the debt ceiling,” Jefferies economist Thomas Simons wrote in a note to clients. “As a consequence, the four- and eight-week bills saw a bit of yield separation” in the when-issued market.

Treasury bills maturing in October and November — which align with the Congressional Budget Office’s estimates — have cheapened relative to the rest of the short-end curve.

The department slashed the sizes of its three- and six-month bill auctions by $3 billion each as it endeavors to remain below the debt limit, which was reinstated at the beginning of the month. At the same time, it will also sell a $50 billion 57-day cash management bill, while ending the 42-day security after the Aug. 19 settlement.

Money-market traders are already starting to get nervous that the battle over the debt cap could go down to the wire, though they acknowledge that the episode will eventually get resolved. However, this time is proving to be more uncertain as the Treasury said last week it’s not able to provide a specific estimate of how long they will last.

“The implications for this are concerns about how much issuance goes on in the front-end Treasury bills,” Jerome Schneider, head of short-term portfolio management and funding at Pacific Investment Management Co., said during a Bloomberg Television interview before the supply announcement. “They tend to be the things that are held hostage in these types of markets.”

©2021 Bloomberg L.P.


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