dChan - Q Origins Project Archive

Debt Ceiling Set to Fuel T-Bill Drought Holding Rates Near Zero

Interest rates in the U.S. dollar-funding markets are pinned right near zero -- and the pressure that’s been holding them down is only set to intensify. Barring an act of Congress, the U.S. Treasury Department will likely need to slash its cash pile by hundreds of billions of dollars by July, when the currently suspended debt limit is set to return.

That will mandate that the Treasury cut its cash balance back to where it was before lawmakers gave it a reprieve from the borrowing limit. As a result, the federal government could reduce sales of short-term Treasury bills, further contributing to a scarcity that is fueling the downward pressure on short-term rates. The scale of how deeply the Treasury may need to cut its cash holdings which surged as it stepped up debt sales after the pandemic struck is complicated by other factors, as well. The Treasury’s cash balance must return to around $130 billion by July 30. But the government has been spending the $1.9 trillion from President Joe Biden’s rescue plan at a slower-than-expected pace, leaving it with $1.21 trillion in its account at the Fed at the end of the first quarter. That’s about $300 billion more than it initially estimated. It’s possible that income-tax receipts could also exceed estimates as they arrive through June, with stocks hitting record highs last year as the economy began to rebound. The rate on overnight general-collateral repurchase agreements remain cemented at zero, while yields on Treasury bills maturing in three months or less range from minus 0.013% to 0.015%. The pressure on secured rates spilled over to unsecured benchmarks as the three-month London interbank offered rate for dollars slid the most in seven weeks on Wednesday to a new record low, dropping almost 1.1 basis points to 0.17288%, the largest one-day decline since March 4. It’s possible that Congress could step in to pass new debt-ceiling legislation or extend the suspension, which could ease the expected shortage of Treasury bills in the months ahead.

But assuming there is no further change in the size of longer-dated debt sales, Wrightson ICAP on April 19 estimated that the Treasury would have to pay down almost another $390 billion of bills between now and July 30 to reach its cash balance objective of around $130 billion. With the $346 billion that’s already been paid down since the beginning of the year, that means a shrinkage of around 16% in the size of the total bills market.

https://www.bnnbloomberg.ca/debt-ceiling-set-to-fuel-t-bill-drought-holding-rates-near-zero-1.1594067