Now that the US debt ceiling deal is wending its way through the Hill, some people are worried about the financial stresses that could come from the Treasury rebuilding its cash reserves with a deluge of debt sales.
Restoring a healthy balance at the Treasury General Account with the Federal Reserve will require about $750bn of Treasury bill issuance over the next three-four months, according to most analysts. That’s chunky, even these days.
Over the rest of the year it will probably come to well north of $1tn, on top of the US government’s normal budget financing programme. The worry is that this will suck liquidity out of the financial system at a time of already-elevated stresses in the banking industry.
But Deutsche Bank’s George Saravelos argues people need to chillax:
First, it is not appropriate to treat the TGA rebuild as a monetary policy event akin to QT. All that will happen is investor allocation will shift from one cash-like instrument to another; there will be no large scale duration withdrawal from the market. The TGA fell by more than $400bn from February to mid-April yet the dollar and equity markets were unchanged during that period. The four largest TGA rebuilds over the last two decades have also had a minimal impact on the market. Why should anything be different now?
Second, it is not even clear how much the TGA rebuild will withdraw excess liquidity from the banking system. This depends on who buys the t-bills. If money market funds rotate their holdings away from the Fed’s overnight reverse repurchase facility (which also drains liquidity) the net liquidity effect will be neutral. If bank depositors buy treasuries, this will lead to a liquidity withdrawal. We would argue that the former (neutral) effect could be just as big as the latter (negative effect) leaving an overall liquidity impact that is far less than headline numbers suggest.
To be sure, there are likely to be “plumbing” effects on repo and swap spread rates on the back of the extra issuance. But we would argue liquidity matters for the market only to the extent it shifts risk-taking incentives via changing the price of fixed income (the duration effect of QT) or sentiment (the signalling effect on future policy) and these are not at play here. It is the outlook for growth, inflation and monetary policy that is going to be more relevant rather than the TGA.
We’re inclined to agree, but on balance it might be nice of the Treasury decided to play it safe and take a more gradual longer-term view on replenishing its bank account?