What the latest US Treasury QRA means for the economy & markets

A decline in outstanding T-bills is set to exacerbate Fed tightening, but the market impact of increased net coupon supply is nuanced, with gross issuance likely below market expectations.

Executive summary

• After seven consecutive quarters of material net T-bill issuance, the level of outstanding T-bills is expected to fall by over $300bn in 2Q24. Meanwhile, net coupon issuance is expected to rise above $500bn in 2Q24.

• When net T-bill issuance is funded by withdrawals from the Fed’s RRP facility, and this is used to fund the government deficit (as opposed to building the federal government’s cash balance), this acts to shift “idle” funds into the “real” economy, providing an economic stimulus. With the RRP facility recording a huge decline as quarterly net T-bill issuance has averaged >$500bn across 2Q23-1Q24e, this is likely a material reason behind the acceleration in real US GDP growth in 2H23.

• The absence of this stimulatory offset to the Fed’s tightening in 2Q24 is likely to significantly increase downward pressure on commercial bank deposits and the M2 money supply. In-turn, this is likely to place further downward pressure on inflation and economic growth, while add…