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HomeEconomyA Debt Ceiling Resolution Might Usher in a $700 Billion T-Bill Tsunami,...

A Debt Ceiling Resolution Might Usher in a $700 Billion T-Bill Tsunami, Draining Market Liquidity

While the nation waits for a resolution on the debt ceiling standoff between President Joe Biden and Republicans in Congress, Goldman Sachs makes an eye-opening prediction. If lawmakers agree to lift the debt ceiling, they estimate the Treasury Department could swiftly issue between $600 billion to $700 billion in Treasury Bills (T-bills).

Despite the ongoing political stalemate, Treasury Secretary Janet Yellen continues to sound the alarm, warning that the government could deplete its cash reserves as early as June 1. House Speaker Kevin McCarthy, on the other hand, hinted at a possible resolution before the looming June deadline.

Once an agreement is struck, and as most market watchers expect, the Treasury could promptly saturate the market with T-bills. The objective? To replenish its cash balance to a comfortable $550 billion within a short span of six to eight weeks following the deal. It’s worth noting that just last Friday, the Treasury General Account stood at a paltry $60.7 billion, a drastic reduction from $140 billion a week earlier.

However, the Treasury’s ambitious move comes with a significant market repercussion. Goldman predicts a net supply of over $1 trillion T-bills in the market this year, sucking liquidity out of the financial ecosystem. Bank of America analysts concur, drawing parallels between the Treasury’s action and an equivalent economic impact of a Federal Reserve rate hike of 25 basis points.

The banking sector, still feeling the shockwaves of Silicon Valley Bank’s collapse and ensuing deposit outflows from regional banks, will have to brace for more turbulence. Added to that, the allure of higher yields has been shifting money from bank accounts to money market funds, courtesy of over a year of consistent Fed rate hikes.

Goldman’s analysis further predicts a potential drop in bank reserves between $400 billion to $500 billion. This is attributed to three main factors: the Treasury’s drive to rebuild its cash balance, the continued outflow of deposits, and the ongoing quantitative tightening program of the Federal Reserve.

As we hover on the precipice of a debt-ceiling resolution, investors and entrepreneurs are well-advised to prepare for a turbulent period of liquidity adjustment. The impending T-bill flood underscores the interconnected nature of fiscal and monetary policy and their far-reaching effects on the financial market landscape.