Treasury Bill Issuance Returns This Week, And Stocks Have Struggled On Settlement Days

Educational market commentary. Not investment advice. Not a recommendation.

By Michael Kramer, Mott Capital Management

The granular options-positioning, individual-name setups, and exact levels live in the paid daily member commentaries. This is the free weekly takeaway.

This coming week marks the return of Treasury bill net issuance. We had been in a period of paydowns, where the Treasury was issuing fewer bills than were maturing, and that flips in July back to net issuance, with the Treasury offering more bills than are maturing. This week brings about $39 billion in net new issuance, with $17 billion on Tuesday the 7th and another $12 billion on Thursday the 9th.

The reason we care so much about this is what tends to happen on Treasury bill settlement dates. Going back to the end of October, semiconductors have risen only 40% of the time on settlement dates, with the SMH down 52 basis points on average. On non-settlement dates, the SMH has risen 65% of the time, with an average gain of 55 basis points.

Interestingly, Treasury bonds have performed better on bill settlement dates than on non-settlement dates, while the VIX has risen on settlement days 58% of the time and declined 42% of the time. So it isn’t just that the market tends to go down on settlement dates; volatility tends to be higher, too.

The reason this is happening now is that the TGA (the Treasury General Account, the government’s checking account at the Fed) has gone from about $1 trillion down to about $771 billion, and the Treasury now needs to rebuild it back toward the $1 trillion mark. The Treasury has already laid this out: modest reductions to short-dated bill auction sizes in June, around mid-month tax receipts, then incrementally larger bill auctions across the curve in July, continuing until we get closer to the September 15 tax date, when a period of paydowns is likely to return. Treasury estimates the TGA could peak at $1 trillion in late July and sit around $950 billion at the end of September.

The quarterly refunding documentation indicates about $348 billion in total bill issuance during the July-to-September quarter, so the sizes we’re seeing this week should continue to increase over the next several weeks and could become rather large. That likely means the TGA will begin to refill quickly, which will weigh on reserve balances, currently around $3.1 trillion. Those should get pushed back toward the $2.75 to $2.8 trillion range, possibly toward the lower end as we saw in October.

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-Mike

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Glossary by Claude

Treasury bill net issuance / paydowns: When the Treasury sells more bills than are maturing, it is net issuance, which pulls cash out of markets; when maturities exceed new supply, it is a paydown, which returns cash.
Settlement date: The day payment for newly auctioned Treasury bills actually comes due, when cash leaves buyers’ accounts and moves to the Treasury.
Treasury General Account (TGA): The federal government’s checking account at the Fed; rebuilding it pulls cash out of the banking system, while drawing it down adds cash back.
Reserve balances: The cash banks hold at the Fed, the base layer of banking-system liquidity; they fall as the TGA refills.
SOFR (Secured Overnight Financing Rate): The benchmark overnight rate for borrowing cash against Treasury collateral; it rises when cash grows scarce relative to collateral.
Interest on reserve balances (IORB): The rate the Fed pays banks on their reserves; a widening SOFR-to-IORB spread is a classic sign that money-market liquidity is tightening.
Reverse repo facility (RRP): A Fed facility where money-market funds park spare cash; it served as a buffer that helped fund bill issuance until it was drained.
Quarterly refunding announcement (QRA): The Treasury’s quarterly statement of how much debt it plans to issue and across which maturities.
Basis point: One hundredth of a percentage point; 52 basis points equals 0.52%.

Disclaimer

This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.

Treasury Bill Issuance Returns as Markets Face a Liquidity Test

Treasury Bill Issuance Returns This Week, And Stocks Have Struggled On Settlement Days

Glossary by Claude

Disclaimer