PUBLISHED BY LAURENT MAUREL | JUN 23, 2023 |
The U.S. debt crisis has been avoided, but the Treasury must urgently issue an avalanche of very short-term bonds to pay its bills:
How much money does the U.S. government need?
Initial estimates put the colossal figure at $550 billion, to be found immediately, starting this summer.
This figure does not take into account the exceptional measures put in place by the Treasury to continue operating during last spring's crisis, nor the $225 billion in short-term debt maturing this summer, which will have to be replaced by new borrowings.
JP Morgan estimates that around $1 trillion worth of Treasuries will have to be sold over the next few weeks.
Rates on these short-term loans are above 5%, but with inflation hovering around 4%, real yields are certainly not sufficient to attract sufficient demand.
Foreign investors eased off during the Covid crisis, and their appetite for these U.S. bond products is far from back on the upswing:
China continues to accelerate its sales of Treasuries:
The US Treasury will have to rely on other buyers.
The Treasury can count on bank reserves held with the Fed: when rates were at zero, the Fed offered banks an opportunity for higher returns by increasing the interest on their reserves held in "Reverse Repos" accounts. These reserves now enable the banks to exchange this cash for Treasury bonds at higher rates. The amount of reserves held in Reverse Repos accounts is decreasing significantly as Treasury bonds are issued.
The banks also have their own reserves, estimated at $3 trillion.
When all reserves are taken into account, even if the amount of the Treasury auctions is colossal, there is theoretically enough liquidity available in the banks to absorb the avalanche of new Treasury auctions.
Nevertheless, raising the equivalent of a third of bank reserves on the market will not be without consequences for the availability of liquidity to the system as a whole.
This avalanche of new debt is being triggered at a time when other liquidity needs will very quickly arise from companies having taken advantage of the period of negative interest rates to borrow massively... but on increasingly shorter maturities.
The most fragile companies will soon be faced with a debt wall: refinancing these loans will have to be done in a market that is already very tight in terms of liquidity.
For the moment, the markets don't seem to be worried about this threat. On the contrary!
Global equity funds have attracted their biggest inflows in twelve weeks. In the week ending June 14, investors injected a net $16.18 billion into global equity funds!
This inflow of capital was concentrated mainly on seven Nasdaq stocks: META, AMZN, AAPL, MSFT, GOOGL, TSLA and this year's star performer: NVDA.
The rest of the market is hardly benefiting from this stock market mania fuelled by speculation around Artificial Intelligence:
In a sign of the current speculative craze, the market has just seen an all-time high in call buying on the SPX:
Opmerkingen