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Last-Minute Debt Ceiling Deal Could Still Have Negative Aftereffects

S.J. Steinhardt
Published Date:
May 18, 2023

GettyImages-918508630 Money Dollars Gain Income Wealth Stats Charts Graphs

As Wall Street hopes for a deal on the debt ceiling before the United States is faced with default, financial experts are still concerned about the aftermath of an 11th-hour agreement, Bloomberg reported.

Ari Bergmann, founder of New York-based Penso Advisors, told Bloomberg that the Treasury Department will need to replenish its dwindling cash buffer through massive Treasury-bill sales. Bank of America Corp. estimated that such a move would have the same economic impact as a quarter-point interest-rate hike.

“My bigger concern is that when the debt-limit gets resolved—and I think it will—you are going to have a very, very deep and sudden drain of liquidity,” he said. “This is not something that’s very obvious, but it’s something that’s very real. And we’ve seen before that such a drop in liquidity really does negatively affect risk markets, such as equities and credit.”

After a debt-cap resolution, the U.S .cash stockpile, called the Treasury General Account, should go from the current level of about $95 billion to $550 billion by the end of June, and then $600 billion three months later, according to Treasury’s most recent estimates.

A rebound will affect liquidity across the financial system because the cash pile operates like the government’s checking account at the Federal Reserve, Bloomberg reported, as it is on the liability side of the central bank’s balance sheet. 

There is also the Fed’s reverse repurchase agreement facility (RRP), which is where money-market funds stash their cash with the overnight at a rate of just over 5 percent. That $2 trillion is also a liability at the Fed. If the Treasury account increases, but RRPs drop, then the drain on reserves is lower.

Money funds’ tendency to keep cash in RRPs will most likely persist, Matt King, a global markets specialist at Citigroup, told Bloomberg. That could mean a sizable drain in bank reserves when the Treasury’s cash rises.

“We are shifting from a very significant tailwind of global central bank liquidity over the last six months to probably a significant headwind,” he said. “What we really care about is reserves, which should be falling. So I’m strongly leaning to risk-off at this point.”

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