JPMorgan Chase & Co. anticipates strong demand for short-term Treasury bills, suggesting that the U.S. Treasury has room to expand the supply of these securities. This outlook is based on the potential for heightened interest from various key investor groups.
Money-market funds, currently the largest buyers of Treasury bills, are expected to increase their purchases due to new regulatory requirements. Additionally, Federal Reserve officials have indicated that the central bank’s holdings should shift more towards bills. Other potential significant buyers include stablecoin issuers and Berkshire Hathaway Inc., whose current holdings in Treasury bills represent a relatively small share of the market.
With expectations that the U.S. deficit will remain substantial in the coming years, the Treasury will need to decide how to balance its borrowing needs between short-term bills and longer-term notes and bonds. As of April 30, bills comprised 21.8% of marketable Treasury debt, exceeding the recommended 15% to 20% threshold set by the Treasury Borrowing Advisory Committee for the seventh consecutive month. The committee’s May meeting minutes indicated a willingness to revisit this recommendation given the sustained demand since the original guidance.
“Until the need for more borrowing capacity arises in mid- to late-2025, the share of bills is unlikely to rise significantly above 22%,” JPMorgan strategists led by Teresa Ho wrote in a note to clients. “However, the good news is that when that time comes, there are structural buyers ready to absorb that supply.”
Government and prime money-market funds accounted for $2.1 trillion, or 35%, of the bill investor base as of March, a 19 percentage point increase from a year earlier. The 2023 regulatory reforms expected to be implemented this year, along with anticipated Fed interest rate cuts, are likely to further stimulate this growth.
The Fed’s holdings of Treasury bills, which made up 3% of the market as of March, could increase by about $180 billion if the central bank starts reinvesting all maturing mortgage-backed securities into bills. Both Fed Chair Jerome Powell and Governor Christopher Waller have supported increasing the Fed’s bill holdings.
Stablecoin issuers like Tether Holdings Ltd. and Circle Internet Financial Ltd. currently own only 1% of the T-bill market, but this share is expected to grow significantly if supportive legislation is enacted. Such legislation, which has bipartisan backing, would require stablecoins to be backed at least one-to-one by high-quality liquid assets like Treasuries, potentially increasing demand from existing and new issuers.
Berkshire Hathaway’s holdings of Treasury bills surged to $158 billion in March, about 3% of the market. Chairman Warren Buffett cited a lack of attractive investment opportunities and favorable cash yields as reasons for this increase. JPMorgan predicts that these factors could push Berkshire’s cash pile to $200 billion by the end of the second quarter.
“Markets will have no issues absorbing the additional T-bill supply, with demand remaining robust,” Ho wrote. “More importantly, the demand from key buyers in the T-bill market is expected to remain substantial, if not expand, in the near term.”
Market Implications and Investment Opportunities
Short-Term Market Reactions: The projected increase in demand for Treasury bills could lead to short-term gains for investors focusing on these securities. Enhanced regulatory requirements and shifts in Fed policy could make T-bills an attractive investment, potentially driving up their prices and lowering yields.
Long-Term Market Impact: Sustained demand for T-bills suggests a stable investment environment for these instruments. Investors can expect continued strong interest from institutional buyers such as money-market funds, the Federal Reserve, and large corporations like Berkshire Hathaway. This stability could provide a reliable, low-risk investment option amidst broader market fluctuations.
Strategic Diversification: Given the robust demand for Treasury bills, investors might consider incorporating a mix of short-term government securities into their portfolios. This strategy can offer stability and liquidity, balancing higher-risk investments in equities or longer-term bonds.
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