Wells Fargo saw the same data and agreed with the direction but focused on a different piece of the puzzle: money market funds. "If recent history is repeated, money market funds "will only be able to absorb a fraction of the July new issuance"," said Angelo Manolatos, a strategist at Wells Fargo. "Therefore, money will likely need to be pulled from other money market fund investments, including private reverse repo balances."
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Bank of America likewise forecast that SOFR would face upward pressure due to the July bill supply.
Barclays took the opposite view, arguing that the market's response to the bill supply forecast was excessive.
The disagreement centers on how the Treasury's increased borrowing will drain bank reserves and tighten liquidity - a dynamic that typically pushes SOFR higher relative to the fed funds rate. SOFR is based on overnight repurchase agreements backed by Treasury collateral, whereas the fed funds rate reflects unsecured interbank lending. When T-bill supply rises, money market funds often shift from repo investments into bills, reducing cash available in the repo market and putting upward pressure on SOFR.
However, the Federal Reserve's reverse repo facility can absorb some of that pressure, complicating the outlook. Wells Fargo's reference to private reverse repo balances highlights one channel through which money fund cash can be redeployed, but the net effect remains uncertain.
The Federal Reserve has held its target range for the federal funds rate at 3.5% to 3.75% since December. The average SOFR rate this year is 3.64%, a level that has exceeded the fed funds rate by one to two basis points.
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