U.S. Banks Will Lose $450 Billion As the Treasury Begins Its Massive Borrowing Spree
Morgan Stanley predicts that when the US Treasury releases a fresh batch of T-bills, roughly $500 billion will leave American banks.
According to CNBC, Morgan Stanley forecasts a total net issuance of $1.364 trillion in T-bills for the remainder of this year, with $1 trillion expected to be released in the next four months.
The bank predicts that the fresh influx of US bonds would put enormous pressure on financial institutions that cannot match the rates given by the federal government.
Expert Betsy Graseck says, “Our fixed income group estimates that around $450.0 billion will leave the Treasury’s General Account during the next four months, most coming from banks’ reserves.”
Despite suffering early in the year as the sector withstood the collapse of many significant institutions, US bank stocks have rebounded.
However, Graseck warns that the rebound might be temporary if banks are hit with a flood of withdrawals. The recent intraquarter rally in bank stocks would be halted by a re-acceleration of deposit withdrawals.
Similar predictions were made by analysts at JPMorgan and Morgan Stanley earlier this month, with JPMorgan predicting $1.1 trillion in T-bill issuance for the remainder of 2023 and Morgan Stanley predicting $1.2 trillion.
Banks may need to increase their deposit rates in response to the increase in yields. Morgan Stanley warned in a recent research note that even while markets have stabilised since the US government reached an agreement to increase the debt limit, more volatility may be on the horizon. The economists point to 2011 as an example, when markets saw a sharp decline after the government resolved a debt limit problem.
In light of this situation, the current market calm may not last. The equities, rate, and credit market volatility is under control and far lower than in March. The markets were peaceful before the X-date in 2011 but saw significant volatility thereafter.
High-yield bond index spreads widened by more than 160 basis points three weeks after the resolution, while the S&P 500 dropped by almost 12 percent. Ten-year Treasury rates decreased by 70 basis points.