T-Bill Deluge Ahead? Why This Portfolio Manager Thinks US Could Have Its Own Bank Of England Moment

Zinger Key Points
  • Conducive conditions had allowed the market to smoothly absorb the growing debt supply in the past, he said.
  • Costa noted that given the adverse macro environment, the emergence of a supply-side problem requires much greater attention.
  • Foreign investors have not been net purchasers of U.S. Treasuries despite the substantial influx of issuances lately, he said.

Otavio Costa, a portfolio manager at Crescat Capital, believes the United States is primed to have its own Bank of England moment given that the Federal Reserve may have to end up buying Treasury Bills as a last resort.

This is because a deluge of bonds is anticipated to hit the market in the coming times as the Treasury Department ramps up its borrowing following the debt ceiling deal.

Costa noted in his tweet that in the past, lack of inflation concerns, foreign investors’ demand for Treasuries, absence of bank failures and the Fed's ultra-dovish stance allowed the market to smoothly absorb the growing debt supply without significant disruptions.

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However, given the adverse macro environment, the emergence of a supply-side problem requires much greater attention, he said.

Borrowing: The Treasury Department is expected to soon replenish its coffers by selling more than $1 trillion of debt papers through the end of the third quarter. The U.S. cash stockpile, or the Treasury General Account, will surge to $550 billion as of the end of June and reach $600 billion three months later, according to a report.

Costa pointed out that foreign investors have not been net purchasers of U.S. Treasuries despite the substantial influx of issuances lately.

"The current lack of demand is indeed a growing problem that may ultimately necessitate the intervention of the Fed as the buyer of last resort," he said in his tweet.

The iShares 1-3 Year Treasury Bond ETF SHY lost 0.45% while the Vanguard Short-Term Treasury Index Fund ETF VGSH lost 0.5% over the last month, according to Benzinga Pro.

BoE Moment: The portfolio manager highlighted the historic sell-off of U.K. gilts or bonds in 2022 triggered by a tax reduction announcement. Bond market volatility had ramped up after former U.K. Prime Minister Liz Truss announced a bold stimulus program that included tax cuts and investment incentives.

The situation had forced the Bank of England to reverse its quantitative tightening course and intervene as a buyer of U.K. bonds, he noted. "In our strong opinion: The U.S. is primed to have its own BOE moment," Costa said.

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