The bond market's concerns have changed from the possibility of default to the depletion of Treasury Bills expected to hit the market, impacting short-term borrowing rates.
The Treasury Department is expected to replenish its coffers by selling more than $1 trillion of bonds by the end of the third quarter, Bloomberg said. With such a massive supply of paper hitting the market and with yields already trending higher due to the Federal Reserve's aggressive monetary policy, short-term yields are likely to increase significantly in the near future.
With a competition of banks for cash, the lenders may see their short-term funding rates increase. This may force them to raise their lending rates to households and businesses, the Bloomberg report said.
Bank of America Corp. analysts have forecasted it would have the same economic impact as a 25 basis points interest rate hike, according to the report.
The iShares 1 - 3 Year Treasury bond ETF SHY lost 0.43%, while the Vanguard Short-Term Treasury Index Fund ETF VGSH lost 0.48% over the last five days, according to Benzinga Pro.
Experts say there will be a knee-jerk reaction in T-bills as the market has borne the burden of uncertainty, said Kevin Flanagan, head of fixed income strategy at Wisdomtree Investments. So yields come down from their highs, but because the government will increase issuance, there is a floor in yields for that market, he said.
The Treasury General Account, or the U.S. cash stockpile, will increase to $550 billion by June and reach $600 billion three months later, according to the Department of Justice's projections at the beginning of the month.
Efrain Tejeda, a short-term interest rate strategist at Morgan Stanley, says T-bill issuance will amount to $730 billion over the next three months and about $1.25 trillion over June through December.
Major banks demand withdrawals are valid, Warns cash can be refused at will.