Predicting higher bond yields & possible bank instability

Investment Analysis Clubs Macro Economic Trends and Risks
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For Banks, Debt-Ceiling Drama Doesn’t End With a Deal

A wall of money to replenish the government’s cash hole could cause instability if it makes banks’ deposit issues worse

By Telis Demos, The Wall Street Journal, May 24, 2023

Even once the debt ceiling is resolved, there may be more plot twists for American companies—especially deposit-hungry banks…

Since the Treasury must refill a huge hole that the multimonth drama has forced it to dig [the unconventional means used by Treasury to prevent default even though expenses were higher than inflow – W], the refunding process could add to the competition for the cash of savers and investors. That would exacerbate worries about banks’ funding… [end quote]

The Fed is also continuing its Quantitative Tightening program (QT), the very gradual rolloff of longer-term Treasury and mortgage debt. This will cause higher interest rates at longer durations.

Banks which bought long-term debt (including Treasuries) in 2020-2021 to stretch for yield while the Fed practiced ZIRP will be hurt.

The next few months may present an opportunity for investors to lock in unusually high yields.

Wendy

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I don’t know about locking in, but the 21-day CMB (CUSIP 912796X53) that I will purchase tomorrow will have a rate of 6.326%. That means that on that money, I will earn 6.326% for 21 days instead of 4.75% in the govt money fund (of whatever similar fund the money is in). And if the govt can’t come up with the money at maturity on 6/15, then they will very likely extend the maturity at the same rate. I’ll take it.

As far as locking in goes, the 2-year auction was only 4.3% and the 5-year was only 3.749%. Not very attractive for locking in.

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I couldn’t find 912796X53.
Wendy

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Auction was yesterday, issuing tomorrow.

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