A repeat of the debt ceiling ignites new demand for Fed tools

U.S. Treasury Update

Strategists warned that the imminent restoration of borrowing restrictions by the US government will cause Wall Street to scramble to deposit cash in the Federal Reserve, as investors face an increasingly serious drought in ultra-safe short-term securities.

Friday marked the end of the two-year suspension of the debt ceiling, which limited the Treasury’s ability to issue new debt.

Few people think that policymakers will face the risk of US default by not raising the debt ceiling or suspending it again. But as a new agreement is finalized before the expected hard deadline in the next few months, the pressure on money market funds and other investors to seek record-breaking relief from the U.S. central bank this year may get worse.

Gennady Goldberg, interest rate strategist at TD Securities, said: “This is a very slow train wreck.”

“The longer they delay raising the debt ceiling, the more the Treasury needs [reduce] Goldberg added that the “supply of bills” reduces debt available for investment, especially on a short-term basis. “You will see increasing pressure on money market interest rates, which in turn will put pressure on money market funds.”

Money market funds are designed to be highly stable investment tools and are used as a place for investors to deposit funds while watching other assets (such as stocks).

These funds are the cornerstones of the broader financial market, usually holding very short-term debt, and paying a small but positive interest rate under normal circumstances.Earlier this year, a large amount of cash flooded into the financial system, pushing some interest rates to negative values, resulting in Blockbuster industry take care of $4.4tn assets It is not profitable in the United States.

In recent years, raising the statutory limit of federal government borrowing has become a fierce partisan issue in the United States, although the parties have always been late to reach an agreement to avoid default. Strategists expect a similar situation this time, because of the conflict between the two political aspects.

Congressional Budget Office Expected The Ministry of Finance may run out of cash in October or November, once it is determined “Extraordinary measures“Departments can hire to give themselves more space has been exhausted.

This challenge On the eve of this deadline, investors will encounter situations where there is too much cash to find a house and too few viable securities to buy-is nothing new.

Since the beginning of this year, excess reserves in the banking system have surged, partly because the Federal Reserve buys $120 billion in U.S. Treasury bonds and mortgage-backed securities each month as part of special measures to support the economy’s recovery from last year’s Covid-19 blockade. Finances The Ministry’s efforts to release funds related to the relief plan passed by the Biden administration in March will only increase the cash in the system.

This is in direct conflict with the reduction in the supply of short-term bills in circulation, as the Ministry of Finance is also trying to extend the maturity of its outstanding debt stock.

Morgan Stanley estimates that as the Treasury’s cash balance has fallen from approximately US$1.6 trillion in January to less than US$590 billion, so far this year, the Treasury has reduced outstanding bills due in one year or less. The amount has been reduced by approximately 800 billion U.S. dollars. According to the bank, the balance will fall further — the Treasury Department’s goal is to reach US$450 billion by the end of July and start to decline from there — meaning that by the end of September, the supply of bills is expected to shrink again by US$250 billion.

Strategists said that the decline in supply will once again trigger a surge in demand for the Fed’s reverse repurchase program (RRP) tool, which provides a place for certain banks and investment groups to store cash overnight.

The use of the facility this year hit a record high, but the demand is indeed high take off In June, the U.S. Central Bank began to pay interest on currency held overnight in response to a decline in short-term interest rates. This move is designed to support the “smooth operation of the short-term financing market” and at the same time increase the interest that banks pay for excess reserves held by the Federal Reserve.

According to Federal Reserve Chairman Jay Powell, the RRP tool, as a pressure relief valve for a liquid financial system, worked exactly as expected.

Lou Crandall, chief economist at Wrightson Icap, believes that demand may surge to US$1.5 trillion, higher than the historical record of US$992 billion set at the end of the June quarter, as short-term interest rates are expected to fall before the debt is repaid. Conditions of money market funds and other participants. According to John Canavan, an analyst at Oxford Economics, the RRP interest rate is usually 0.05% compared to other investments, which is usually more attractive.

At this rate, strategists began to speculate when the Fed might need to adjust further in response to the upcoming surge. The Fed expanded the number of companies that can use the tool and raised the maximum amount that can be used in March to $80 billion. .

Blake Gwinn, head of US interest rate strategy at RBC Capital Markets, said: “Under the current reserve environment, we still have a long way to go until the demand for RRP will not be very large.” He added that for short-term debt, “it’s just Part of the landscape”.

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