(Bloomberg) -- The shrinking supply of Treasury bills is putting downward pressure on financing rates for US government securities, but interest-rate strategists at
The Treasury Department has been cutting the supply of bills — debt that matures within a year — to conserve borrowing authority until the federal debt limit is raised or suspended and in anticipation of tax receipts.
With fewer T-bills to buy, money-market funds with cash to invest are doing more repo — extending overnight credit to owners of Treasuries, causing the rates on the loans to decline. The Secured Overnight Financing Rate representing that market fell to 4.30% last week, the low end of its range since mid-January, according to Federal Reserve Bank of New York data published Monday.
While a further decline is possible in the coming weeks, "the magnitude of the softening might be limited,"
The potential offset, they say, comes from market-structure considerations. Money funds in February increased their repo holdings by $121 billion to a record $2.5 trillion, accounting for 35% of portfolios, Crane Data cited by
On the dealer side, however, only the five largest ones have kept with the growth.
Repo rates are still higher than the 4.25% RRP offering rate, however, leaving scope for additional declines as T-bill supply declines further. Strategists at Citigroup Inc. predict bills outstanding, which peaked near $6.4 trillion in November, could reach $6 trillion by the end of May if the debt limit isn't addressed. That's less than in January, when the SOFR rate got as low as 4.27%.
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