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.”