Exponent: What is at stake for the markets as the debt ceiling approaches

Exponent: What is at stake for the markets as the debt ceiling approaches

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. 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. WHERE DOES THAT CASH GO?

WHAT CAN THE TREASURY DO AHEAD OF THAT? 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. 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.

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

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. 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

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