Posted by Justin Mandeville, Portfolio Manager on Aug 15, 2018, in Fixed Income
Invesco Fixed Income does not anticipate significant market disruption due to the new T-bill offering
A new 2-month Treasury bill (T-bill) will launch in October, according to details announced by the Treasury on Aug. 1. The new T-bill will share a schedule with the 1-month T-bill, which is currently auctioned on Tuesday and settled on Thursday of the same week. Then on Dec. 6, both bills will transition to a Thursday auction and settlement the following Tuesday. Invesco Fixed Income believes that this transition period should allow investors to become familiar with the new bill and help minimize the possibility of disruption at the short end of the Treasury bill yield curve.
The why: Benefits to the Treasury
The Congressional Budget Office projects that the federal debt will rise steadily over the next decade, driven primarily by tax and spending legislation enacted in December 2017. As noted in our previous blog, Get ready for the 2-month T-bill, the government is considering ways to finance its growing budget deficit with increased borrowing, including potential increases in net T-bill issuance in the coming years. In its most recent borrowing announcement, the Treasury estimated it would borrow a net total of $769 billion in the second half of 2018, compared to $462 billion in the second half of 2017.1
The new 2-month T-bill could help the Treasury meet this increased funding need, while at the same time reducing upward pressure on existing T-bill yields by spreading auction sizes across more maturities. It could also allow the Treasury to manage its target duration more effectively and take advantage of lower funding costs associated with shorter-maturity T-bills.
The what: Market impact
Invesco Fixed Income does not anticipate significant market disruption due to the new T-bill offering or its modified schedule. However, the addition of 2-month T-bills, coupled with potential changes to 1- and 3-month auction sizes, may change the dynamic of the very short end of the T-bill curve. In particular, it may boost yields of 2-month T-bills due to the introduction of new supply to the market.
The ultimate impact on 2-month yields will likely depend on the sizes of the new 2-month auctions and any potential adjustments to the sizes of the 1- and 3-month auctions. The Treasury has indicated that the 2-month auction will initially be around $25 billion (this could trend upward).2 We believe this amount should be digested easily by the market, as the maturity may be a good fit for money market portfolios, which must maintain a weighted average maturity of 60 days or less. It remains to be seen if, and by how much, the 1- and 3-month auction sizes will be adjusted.
[1] Source: US Department of the Treasury, July 30, 2018, SIFMA, data from July 31, 2017, to Dec. 31, 2017.
[2] Source: US Department of the Treasury, July 30, 2018.
Important information
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This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
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It’s official: U.S. Treasury to launch a 2-month T-bill by Invesco US
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