Citi Global Strategist Matt King Is Listening to ‘Money Market Nerds’

(Bloomberg) -- The Treasury General Account is having a moment.

Traders of U.S. short-term interest rates have been obsessed with it for more than a year -- during which it quadrupled in size to $1.63 trillion as of last week. But now that the stockpile is poised for a big drop, it’s gaining attention as a possible source of liquidity that can sustain financial markets more broadly at record highs.

Citigroup global markets strategist Matt King, in a Feb. 8 essay titled “Timing the Market Top,” argues that bank reserves -- where the TGA cash will wind up -- are a bigger driver than even central bank purchases. A decline in the range of $1 trillion to $1.5 trillion by July appears likely, effectively delivering liquidity back into private investors’ hands, he writes.

“The only real debate seems to be whether this is just an issue for money market nerds, or whether it has system-wide relevance,” King wrote. “Both a long-standing conviction that money-market plumbing has an underappreciated significance, and some additional empirical evidence, make us suspect the latter.”

King’s interest is in frothy valuations, and how long they might last. For that, he writes, “you need to follow the money.” The real yields on Treasury Inflation-Protected Securities have been a reliable guide to moves in risk assets, as have asset purchases by central banks globally. But they provide “little reason to expect any sort of ‘melt-up’ beyond what markets have done already.”

The Treasury cash balance, on the other hand, “suggests a radically different outlook.” Citi a few months ago shifted to using a metric for the Federal Reserve “which looks at changes in bank reserves rather than simple securities purchases, largely so as to adjust for the effect of changes in the Treasury General Account,” King wrote.

The cash balance swelled to a peak of $1.83 trillion in July as the Treasury Department ramped up borrowing to pay for pandemic relief spending, which failed to materialize as quickly as expected. Last week, the department forecast a drop to $500 billion by the end of June. An even bigger decline may occur if lawmakers fail to reach an agreement suspending the federal debt ceiling.

“The critical question is whether this is indeed the ‘right’ metric to be tracking for markets,” King wrote. “If it is, then for several months the stimulative effect of $120 billion in monthly Fed purchases looks likely to be more than tripled.”

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