Treasury Drain: Bonds and Bills

Think of it this way

Imagine a town where every shop needs money in the till to serve its customers during the day. The town government needs to borrow and has two places to get the money. The first is a storehouse where several neighbors keep what they have left over and do not plan to use for months: if it takes from there, nobody notices, because that money was sitting idle. The second is the shops' tills: if it takes from there, the shops are left short for doing business. While the storehouse has stock, the government draws from it and nobody finds out. When the storehouse empties, everything it borrows comes out of the tills, and that is felt across the whole town.

What is Treasury Drain: Bonds and Bills?

The United States Treasury spends more than it collects, so several times a week it borrows money by selling debt securities at public auctions. This chart measures how much money that borrowing takes out of the banking system, day by day. That is called the TREASURY DRAIN: the money leaves the accounts of those who buy the debt and enters the account the Treasury holds at the Federal Reserve, where it stops circulating until the government spends it. While it sits there, it is money that is no longer available to lend, invest or buy anything. The chart separates the two ways the Treasury borrows: BILLS are short-term debt, from 4 weeks to 1 year, and NOTES AND BONDS are medium- and long-term debt, from 2 to 30 years, with TIPS and floating-rate notes included. In both cases the day's figure is what was sold minus what matured that same day: positive means the Treasury raised net money, negative that it repaid more than it borrowed. And the split matters because for years only one of the two halves genuinely drained liquidity.

How to read Treasury Drain: Bonds and Bills

UPWARD, the Treasury sold more debt than was maturing and money left the banking system; DOWNWARD, it repaid more than it borrowed and the money came back. The color tells you which series the bar belongs to and whether it moved liquidity: dark red, bonds that take money out; dark green, bonds that return it; light red, bills that take money out; light green, bills that return it; and gray, bills paid for with money parked in the RRP, which therefore did not touch bank reserves. In short: dark is bonds, light is bills, gray does not drain. Spikes fall in the middle and at the end of the month, which is when auctions settle. Lag: none; the move and its effect happen on the same day.

What Treasury Drain: Bonds and Bills means for the market

For years these two series told opposite stories, and that was the value of looking at them together. Bonds are bought by banks, insurers, pension funds and dealers paying with reserves, so they genuinely drained; on top of that, the dealer left holding the inventory has to fund it in the repo market, which puts pressure on funding rates. Bills were bought by money market funds with money parked out of circulation, so they barely hurt. The same deficit weighed one way or the other depending on how the Treasury split it. That has changed: the RRP parking lot went from more than 2,500 billion at the end of 2022 to zero, and without that cushion bills also come out of the banking system. The practical consequence is that there is no longer a cheap half of the deficit, and a season of heavy issuance weighs on reserves whichever way it comes.

Where the money flows

Let us follow the money step by step in both cases. THE BOND PATH: the Treasury auctions a 10-year note and an insurer buys it. The insurer pays the price of that note, say 500 million dollars, and pays it from the account it holds at its commercial bank. The bank deducts those 500 million from its client's account and transfers them to the Treasury, which receives them in the account it holds at the Federal Reserve. At the end of the day that bank has 500 million less and the Treasury 500 million more, and that money is no longer in the banking system. THE BILL PATH: the Treasury auctions a 3-month bill and a money market fund buys it, paying its price, say 100 billion. Here what decides everything is where the fund gets that money. For years it took it from the RRP, a Federal Reserve window where funds park money they are not using and earn interest for leaving it there. That money was held at the Fed itself, outside the banking system, so using it to pay for the bill did not take it out of any bank: it moved from one Fed account to another Fed account, and commercial banks' reserves did not move by a single dollar. Since that parking lot emptied, the fund has nowhere to get it except by withdrawing money from a bank, exactly like the insurer in the first example. On both paths the final destination is the same, the Treasury's account at the Fed, and the money does not return to the system until the government spends it on civil servants' salaries, pensions or payments to its suppliers.

What to watch in Treasury Drain: Bonds and Bills

Mark on your calendar the 15th and the last business day of each month: those are the settlement dates and the worst days for liquidity. In bonds, there is nothing on 78% of days; when there is, 7 billion is typical, above 59 you are in the strongest 10%, and the record is 150. Bills move on twice as many days but with smaller bars, around 15 billion at the median. First look at which of the two colors dominates the season, and then watch for this sequence: several large settlements in a row and, one or two weeks later, a wider spread on the Cash Scarcity chart, which means banks are paying more to borrow cash overnight than what the Fed pays them to keep it idle. Once you have seen both, funding strain is no longer a hypothesis. And if a settlement date coincides with a tax deadline, both drains fall on the same day.

The two halves of Treasury financing. With the RRP exhausted, both come out of the banking system.