Confirming The Shallow State Of Bills

The ongoing money market adjustment remains ongoing, perhaps that tautology is the most that can be interpreted from continuing mixed signals to this point though the longer nonconformities continue the more innocence is threatened. Recognizing again that this is still early in the process, there are some indications that resistance is real and even understandable. That begins first with the very question as to how we might figure what T-bill rates “should” be in the first place. From that follows observations about repos and reverse repos.

The Fed’s RRP took in $185.35 billion from 60 bidders today, up from $160 billion yesterday and $143 billion Friday. Still, however, those totals are within the range of what we have already seen in RRP this year (not counting quarter-end), representing nothing yet of additional liquidity being “drained.” For instance, there was $173 billion in RRP’s on October 29 and $225 billion the next day, $176 billion on July 2, $190 billion January 30 and even $168 billion January 22. If there is some escalation in FOMC-commanded “tightening” it is at this point trivial and arguable.

From strictly the perspective of T-bills, as an almost cash substitute with some price risk attached yields should be dependably above IOER and the “lower federal funds boundary” established by this new corridor approach. If faced with the strict alternative of “lending” cash to the Federal Reserve overnight or the US government at an interval of even weeks or a few months you pick the former every time. Thus, if IOER and RRP’s are set at 25 bps there isn’t a theoretical foundation for bills to trade below that.

Further, we can infer from other market spreads about where bills “should” be trading according to monetary policy. If the FOMC is correct in its economic interpretation, the TED spread should only adjust by the smallest of increments. A policy measure that confirms the “booming” economy would leave some additional risk but only insofar as money market counterparties would like to factor less explicit support for liquidity (which assumes, mistakenly, that central banks actually supply or manage it similarly).