People are asking questions about TIOs again. TIOs are very short term loans by the Treasury to businesses when it has received tax receipts that it does not need immediately.
The TIOs have no impact whatsoever on the market. They are simply a means of delaying the collection of tax receipts for a few days. They neither add to, nor subtract from liquidity in the system.
TIOs are generally aligned with temporary Treasury debt paydowns. They are made available when the Treasury has excess cash from tax receipts. The cash comes in from the banking system to the Treasury one day, is returned to it the next day via the TIO, and then flows back to the Treasury a few days later when the TIO expires. If the TIOs are so important why does no one discuss the potential drain on the system when they expire? Because there is none?
Businesses collect taxes, pay them, get some of the money back for a few days, and then give it back to the Treasury which then spends it, sending it back to the banking system. Businesses know exactly how much they are collecting, what their liability is, what their revenues are etc. so there’s just no overall impact on the banking system, and especially, no impact on the markets.
There are a lot of moronic conspiracy theories out there about the TIO, for example that the Treasury is using it to get cheap money out to its cronies so that they can prop the market. The big problem with that idea is that unlike the Fed’s Open Market Operations, which flow directly to and from the trading accounts of the Primary Dealers, any business that collects taxes and participates in the Tax and Loan program is eligible to get these short term loans. This is money they had collected and held in the first place. Virtually the entire corporate spectrum can participate. Only a small percentage of those participating in the TIO program are trading firms. Contrast this to the 20 Primary Dealers who are the only ones who borrow margin for their trading accounts from the Fed.
In essence the TIOs simply enable businesses to hold on to the cash they had collected and held in their bank accounts for a few more days than they otherwise would have been able to. This spreads out the impact of tax collection days on bank reserves over a course of several days, rather than just one day.
If the Treasury pulled all of the taxes out of the banking system on one day, the Fed would simply be required to replace that drawdown of reserves with repos. That act would directly impact the market because it would have to flow through the Primary Dealers. The TIO program mitigates that need. The funds flow directly and immediately back to bank accounts where they had been, rather than through the conduit of the markets via the Primary Dealers. Meanwhile, as the Treasury continues to spend the collected funds, they come out of the Treasury accounts and back into bank accounts. The TIOs smooth out the ebbs and flows of taxe collections and government spending within the banking system and minimize impacts on the financial markets by keeping the funds mostly out of the hands of the Primary Dealers.
Treasury debt paydowns, on the other hand, usually do have an impact on the market because they are direct cash payments to holders of securities who must then reinvest the proceeds in a market with temporarily insufficient paper to absorb the cash. The paydowns therefore push down interest rates on the settlement date unless the Fed acts to offset the action by withdrawing the reserves. So while TIOs are essentially a matter of switching cash from one pocket to another and back to the first again, Treasury debt paydowns do create a temporary shortage of supply against excess demand which temporarily has the potential to drive up the prices of financial assets.
TIOs tend to be concurrent with Treasury debt paydowns, so there may be the appearance of a relationship between TIO actions and market action. However, the reality is quite different. It is the paydowns which are driving the action, not the TIOs.
Sorry Lee, have to disagree with you. If they are just managing short term cash surpluses with TIOs, then why would they borrow $49B on 2/14 and 2/15 in Cash Mgmt Bills at 60 day rates (that we taxpayers have to pay BTW), and then turn around and fund 18.5 Billion in TIOs on 2/14 (at overnight rates). Taxpayers lose in this deal. Also on 2/21 the Treasury borrowed $22B in 4 week, 13 week, and 26 week money and immediately loaned out $22B the same day in TIOs. This doesn’t wash with your “temporary surplus cash investment” thesis. This puts money in the hands of PigMen for their short term use at favorable interest rates. There’s no good reason to borrow to fund TIOs (unless you can help our your friends at taxpayer expense). The last two years saw TIO fundings endy by 2/16, and here we are in a market downturn with TIOs funded out to 2/25. This sickens me.
Let’s just look at one example. On 2/14 the Treasury settled a 63 day CMB for $19 billion at 2.44%. That was their cost. They didn’t need it immediately so they offered it to all participants in the TTL program, which is basically every large business in the world that collects wage and other taxes for the IRS. The lent a total of $18 billion for a term of 1 day at rates of 2.75% to 3.05%.
So there are a couple of points here. The borrowing of the CMB had a direct negative impact on the market because it came primarily out of the trading accounts of the 20 Primary Dealers, and to a lesser extent indirect bidders who are mostly big financial market players. On the other hand the participants in the TTL program include everybody. Most of these businesses are not using the funds to trade.
The second point is that the taxpayers made out on the deal since the rate the government paid on the CMB was lower than the rate which it got for the TIOs. The yield curve is inverted at the short end.
Additional evidence that the TIOs were a non issue for the market is the result. The market sold off on both the 14th and 15th. If the cash going back to the banking system for 1 day was such a big deal, the market wouldn’t have tanked.
Furthermore, if the Treasury had not put this money out, then the Fed would have been required to replace the lost reserves via OMO and that WOULD have gone directly into PD trading accounts, instead of into a broad variety of commercial bank accounts via the TIOs. The Treasury made money, and stabilized bank reserve balances for a day.
I recognize that most people will choose to maintain their biases on these things, but the facts don’t support them. I’m interested in researching and understanding how the system works so that my subscribers can benefit from that. I have no interest in defending the rightness or wrongness of government actions. I only want to understand what they are doing and how that impacts the behavior of the markets.
I came to the conclusion that if the TIOs did have an impact, it would be reflected in market action. I could find no discernible impact and in thinking it through I realized that in the overall scheme of things the TIOs were simply a matter of shuffling cash back and forth within the system. There is no net gain or loss to the markets since the cash flows directly between economic units, their banks, and the Treasury, without going through the conduit of the markets.
No impact???
The S&P500 was up over 3.5% from the days they announced these CMBs(2/7 and 2/11) to when funding happened (2/14 and 2/15)–that’s 126% annualized (non-compounded). I see this as a non-trivial impact–even got old O’Neal claiming 2/13 as another “follow through day” over at IBD.
I don’t hold any biases on this topic–I think TIOs are a smart way of managing surplus cash–in the absence of short-term treasury refundings to pay down that will allow them to stay within their minimum cash balance needs. When I see the Treasury essentially borrowing and immediately funding TIOS when there are plenty of 4 week, 13 week, and 26 week refundings that can be paid down, I get a little suspicious (especially when the market/economy are sputtering).
What is truly happening is they are keeping the Treasury supply steady so the Fed/Foreign CBs can feed our reserves to keep the banking system in the lending business. Might as well keep the auction sizes consitent as long as the Fed and Foreign CBs are willing to fund them.
Enjoy your work BTW–I’ve learned a lot from your site over the years
I don’t see how a TIO announcement has an impact when the actual receipt of the cash has no impact. The TIOs are just not a variable in the market liquidity mix because they do not flow through the market.
The first impact is the OMO that day. The second is how much new Treasury supply is hitting, or conversely being paid down. The third is foreign central bank actions. These all directly impact the market, but none to the extent that the OMO does, because that is a direct addition or subtraction from the accounts of the Primary Dealers. Treasury paydowns also are huge because they create a temporary shortage of paper and an excess of cash. It’s not logical to deduce that TIO loans, which do not go directly through the market, but rather go directly into the bank, have any impact on the market when the actions of the Fed, Treasury and FCBs are direct impacts. And it’s just not logical to think the announcements had an impact when the reciept of the cash did not. How would you know, for example, that the TIO’s had an impact given that there were also Fed actions, Treasury actions, and FCB actions on the market that day. It would be impossible.
Most importantly, if the Treasury did not put these funds back into the system temporarily, then the Fed would have to add more repos to offset the draining effect of Treasury borrowing.
Seems to me that when the short term yield curve is inverted, the Treasury has every reason in the world to do this. Nobody is getting ripped off.
Anyway, we’re beating a dead horse, so we’ll just agree to disagree and leave it at that.