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President Joe Biden’s signature of legislation suspending the federal debt ceiling has given the Treasury Department the green light to resume net new debt issuance after months of disruption.
Ever since mid-January, when it hit the US$31,4 trillion debt ceiling, the Treasury has been using special accounting measures to maintain payments on all federal obligations. There were just US$33 billion of those left available as of May 31.
It’s also been running down its cash balance, which dropped below US$23 billion on June 1 — a level seen by experts as dangerously low given the volatility in day-to-day federal revenues and payments.
The bill Biden signed Saturday suspended the debt limit until January 1, 2025, allowing the Treasury to rebuild its cash to more normal levels.
Early last month, the department had pencilled in a $550 billion cash-balance level for the end of June. A widening fiscal deficit also puts pressure on the Treasury to step up borrowing.
Debt auctions are now set to swell. The replenishing process — which could involve an amount well in excess of $1 trillion in new securities — could have unwanted consequences, by draining liquidity from the banking sector, raising short-term funding rates and tightening the screws on an economy that many economists see headed for a recession.
Bank of America Corp has estimated the issuance wave could have the same economic impact as a quarter-point interest-rate hike by the Federal Reserve.
Auction announcements will offer investors guidance on how quickly the Treasury will go about stepping up issuance. On Thursday, the department said it planned to bolster the size of upcoming three-month and six-month bill offerings by US$2 billion apiece in the coming week. It has also already been ramping up its issuance of four-month debt, its newest bill benchmark. — Bloomberg.
Peter Tanyanyiwa
Online Reporter