A statue of former Sen. Albert Gallatin stands at the Treasury Department in Washington, U.S., April 25, 2021. REUTERS/Al Drago

The U.S. debt ceiling comes into effect at the end of July, putting pressure on the Treasury to reduce its cash balance ahead of the deadline. That means more injections of cash into a financial system already awash with liquidity, a scenario that could further sink short-term rates and cause undue distortion in the overnight repurchase market.


The debt ceiling is the maximum amount the U.S. government can borrow, as directed by Congress, to meet its financial obligations. When the ceiling is reached, the Treasury cannot issue any more bills, bonds, or notes. It can only pay bills through tax revenues.

Congress previously agreed to suspend the limit through July 31, at which point the Treasury has only a few months of “extraordinary measures” before lawmakers must either raise the amount, or face consequences of technical default.


Run down its cash. It has a target cash balance of $450 billion at the so-called Treasury General Account (TGA) on July 31. As of June 9, the Treasury’s cash balance was $674 billion, data from financial research firm Wrightson ICAP, down from $1.8 trillion last October.

It is not allowed to run up its cash balances ahead of the debt ceiling, analysts said, because doing so is viewed as circumventing the borrowing limit.

It has more than a month to pare back its cash, unless Congress raises or suspends the U.S. debt limit. If Congress does not, the Treasury has certain extraordinary measures at its disposal.


As the Treasury spends money from its general account, the cash ends up on bank balance sheets, often in the form of money market funds. Wrightson said it expects bank reserves to average between $3.8 to $4.0 trillion in June. read more

With front money market yields so low – in some cases on the cusp of falling below zero , — investors have opted to place cash with the Fed’s reverse repurchase facility, which pays zero interest rates.

Reverse repos have attracted record demand from financial institutions starved for short-term investment options.

On Thursday, the reverse repo volume hit a record $535 billion.

Analysts said massive volumes at the Fed facility suggest underlying market stress – causing pain for cash investors, savers and money markets.


Market participants see a possibility that the Fed, at its next policy meeting, raises the reverse repo rate and the interest on excess reserves (IOER), currently at 0.10%, two rates that influence the effective fed funds to trade within the target range. That should help lift repo and bill rates.

The fed funds rate is a key factor dictating rates on credit cards, mortgages, and bank loans.

(This story refiles to add “U.S.” in headline)

Our Standards: The Thomson Reuters Trust Principles.

Source: https://www.reuters.com/business/finance/whats-stake-markets-debt-ceiling-looms-2021-06-14/

You May Also Like

Analysis: Cash-hungry emerging markets arrive late to the SPAC party

Emerging markets have so far been on the fringes of a fundraising boom using so-called SPACs or special-purpose acquisition companies, which could potentially unlock a vital new source of cash for entrepreneurs in developing regions.

Asia shares volatile as China tech worries remain

Asian share markets were volatile on Tuesday, after Australia’s central bank flagged some tapering in its quantitative easing programme and concerns over the future of China’s powerful technology sector weighed down shares.

Nvidia forecast beats expectations but crypto mining’s role remains unclear

Nvidia Corp (NVDA.O) forecast second-quarter revenue above analysts’ estimates on Wednesday, but shares fell 1% after-hours as the company could not say for certain how much of its recent revenue rise was driven by the volatile cryptocurrency-mining market.