Click For Photo: https://www.zerohedge.com/s3/files/styles/max_650x650/public/2019-08/52%20week%20bill%20auction.jpg?itok=ombZfhV3
When it comes to investing in safe assets such as US Treasuries, the decision process is relatively simple: one buys coupon securities (with a maturity over 1 year), on specific expectations of inflation (or deflation) and receiving current income in the form of a cash coupon (assuming there is one). When it comes to T-Bills the decision is simpler: it's all about liquidity preference - does one keep cash equivalents in the form of US Dollars, whether paper or electronic, or does one purchase Bills, with a maturity from 4- to 52-weeks. If investors are mostly happy to exchange money for Bills, it is generally said that liquidity in the financial system is ample; if however investors are unwilling to part with their "cash" in order to fund the US Treasury (as a reminder, in a time of chronic budget deficits, Uncle Sam has to issue debt to fund its operations), then there is a liquidity shortage.
We bring this up because last week we warned that as the Treasury scrambles to rebuild its cash balance to roughly $350BN from the latest $133BN in Treasury cash, a process that will require the aggressive gross and net issuance of T-Bills, liquidity in the system was set to collapse.
Fact - Bank - America - Liquidity - Shortage
In fact, according to Bank of America the liquidity shortage over the next two months - a period in which as shown in the chart above the Treasury would aggressively be issuing bills - would be so acute, that the Fed may be forced to launch QE, a conclusion which JPMorgan echoed just days later.
Today, we got the first proof that Bank of America may be right when we observed just how tight liquidity already is in today's sale of $28 billion in 52 week bills by the Treasury, an auction which went so poorly...
Wake Up To Breaking News!
Government, where everything works great, until something has to work.