Treasury Department Gets Its Giant Liquidity Vacuum Ready

If you’re in CRE, looking for money, and think you’ve heard the First Call bugle at the beginning of a horse race, you just have. Now that the debt ceiling problem is fixed—for now, at least—the Department of the Treasury has begun the Run for the Greenbacks, which means the ready floods of cash will go for contest where everyone can win, and probably in good terms.

CRE borrowers, especially short-term/? It’s another painful comeuppance that will make rates even higher for now—if the cash is even available.

For all the money available in the markets, for all the dry powder investors have kept to the side, waiting to see how inflation, interest rate hikes, geopolitical conflict, still vibrant echoes of supply chain thrashing, quantitative tightening, labor markets, and other sources of worry, there is only so much at any given time.

Because the federal government has bills to pay, needs money to do so, and worries about a currency printing press-stoked wave of inflation, the Treasury borrows. As the resolution over the debt ceiling extended until a bill passed and President Biden signed it on Saturday, June 3, the Treasury has not been able to issue the additional bonds it needed to sell, there is a great deal of commerce the department must do.

As of June 5, there have been no official announcements of the money it will seek, although rumors in the press suggest something north of $700 billion. Some previous and current say the total could be $1 trillion by the end of September.

The schedule for upcoming auctions is a full dance card, with 4-week, 8-week, and 17-week bill auction amounts to be announced on June 6, auctioned the 7th, and issued on the 13th. On the 8th, it’s announcements of the 13-week, 26-week, and 52-week bills for auctions on the 12th and 13th and issuance on the 15th.

Also on the 8th announcements come the 3-year and 10-year notes and 30-year bonds, again auctions on the 12th and 13th and issuance on the 15th. These rounds won’t be the end.

How this comes into play for CRE is because investment funds are finite, and interest rates are shorter terms Treasurys are attractive, as recently closed auctions show. A batch of 2-year notes issued on May 31 carried an interest rate of 4.250%. The 26-week bills issuing tomorrow are 5.483%.

It’s virtually guaranteed money which will set off two dynamics. The first is that a lot of investors will pull cash from banks, leaving them even more starved for deposits than has been the case lately, so they can invest in what the Treasury is offering. Banks, which have hunkered down with higher CRE loan rates and lower LTVs, will have even less money available.

The second dynamic is that short-term bills will drive up short-term loan rates as lenders need to make more than Treasurys to justify risk. Typically, credit spreads will widen, and stock values drop.

There could be a third issue for CRE, as in tandem banks might sell property loans at a discount, the Financial Times reported. Many banks already feel pressure from CRE loan exposure, as GlobeSt.com reported last week. Unloading at losses would likely push down property values and make further financing even harder to get.