Asian banks in T-bills spree

Strong Asian central bank buying may have been behind a surge in demand for US Treasury bills this week, traders say.

The pronounced pick-up in demand earlier this week took some in the market by surprise – squeezing investors who had sold bills. Traders say the plunge in yields deviated well beyond the usual seasonal decline associated with a fall in supply of treasury bills during the tax season.

“The Asian central bank story is a big part of the recent buying,” said Richard Gilhooly, senior fixed income strategist at BNP Paribas. “That appears to have contributed to richer T-bill valuations.”

Treasury bills are a sector of the government bond market that attract conservative investors seeking a safe place to park their funds for a short period of time. Demand is generally steady for bills and they usually trade with little volatility, as the tax season and other seasonal swings in Treasury funding are well known in advance.

“You don’t need much additional demand in order to have to a large impact on bill prices as there is already a group of investors who regularly buy them,” said Michael Cloherty, fixed income strategist at Banc of America Securities.

Since mid-April as tax receipts have poured into the Treasury, the yield on three-month bills has fallen around 25 basis points to Thursday’s level of 4.78 per cent. However, on Wednesday alone, the yield plunged 9 basis points to 4.73 per cent.

As demand for bills has heated up, the yield on six-month bills fell 5bp to 4.85 per cent on Wednesday, and at its current level of 4.88 per cent remains lower than the late March level of 5.06 per cent. During this time the yield on the rate-sensitive two-year note has risen from 4.58 per cent to 4.78 per cent while the three-month Libor rate has remained steady around 5.36 per cent.

At tax season time, new bill issuance declines and this year, the reduction in outstanding Treasury bills from late March to the end of June should total around $160bn say analysts. That is up from a decline of $125bn in net issuance last year say traders.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.