Next month’s Easter holiday in the U.S. is poised to create cash-flow headaches for the Federal Reserve and investors in Treasury debt.
With U.S. markets slated to be closed on Friday, April 15, the Treasury Department opted to delay settlement of the notes and bonds to be auctioned earlier that week until Monday, April 18. But because it’s not a federal holiday the department will hand investors $69 billion in redemptions and interest payments on April 15 as scheduled, leaving recipients, who normally would roll the proceeds into the new issues, without a home for them.
The disruption is the first since 1972, according to Wrightson ICAP chief economist Lou Crandall, who explained the permutations in a report. Treasury notes and bonds mature and pay interest on either the 15th or the last day of the month, while the timing of Easter Sunday and Good Friday, which precedes it, depends on the lunar calendar.
While the Treasury and Fed can take steps to mop up the excess cash ahead of the long weekend, Crandall wrote, the situation highlights the need for regulatory changes that would make it easier for banks to do it.
“There is a more fundamental fix that could — and should — be adopted at some point,” he wrote. “If reserve balances were exempted from the leverage ratio, banks would be less reluctant to let customers park excess cash on their balance sheets temporarily in unsettled circumstances.”
During the pandemic the Fed allowed lenders load up on Treasuries and reserves without setting aside capital to protect against losses. That relief lapsed at the end of March 2021. The Fed has pledged to propose changes to the so-called supplementary leverage ratio rules, but the timetable remains uncertain, Crandall wrote. Measures he said would help next month include:
Treasury issuing a three-day cash management bill that matures April 18, satisfying the needs of private investors while allowing the Fed — which holds more than $5 trillion of Treasuries on its balance sheet — to roll its $22 billion of maturing coupons into the CMB and then into the new notes and bonds
The Fed arranging an extra overnight RRP on Friday, in addition to its normal four-day operation, for those counterparties that are closed on April 15, since dealers and government-sponsored enterprises may get stuck with some surplus cash
The cash-flow challenge arises as Treasury market has been eroded by uncertainty about how much and how quickly the Fed will raise interest rates this year and funding market stress created by the international response to Russia’s invasion of Ukraine.
