While the US sovereign default has been averted with the Congress reaching the deal to raise the debt ceiling, the aftermath of it will be felt in the financial markets for some months to come.
According to the Economist, the Treasury general account at the Federal Reserve, used for official payments, fell to just $23bn at the start of June, far less than the amount of net spending on a typical day. Typically, the Treasury tries to maintain a balance of at least $500bn, sufficient to cover a week of cash outflows. During the six-month standoff over raising the $31.4 trillion debt threshold, the US Treasury had to dip into its cash holdings to make due payments, eventually approaching the point where it had almost nothing left. Now the Treasury faces a task to replenish its coffers, and it will have to sell more bills and bonds to get this done, which would drain the financial markets for cash.
As per JPMorgan’s recent estimates, in the next seven months, the US Treasury would issue close to $1.1 trillion in new Treasury bills (T-bills).
A BNP strategist estimated that by the end of September, purchases of T-bills could suck some $750 billion to $800 billion out of cash-like instruments, such as bank deposits and overnight funding trades with the Fed.
"Our concern is that if liquidity starts leaving the system, for whatever reason, this creates an environment where markets are crash-prone," Alex Lennard, investment director at global asset manager Ruffer said to Reuters.
Other experts do not share the same concern over the drain on liquidity, suggesting the T-bill issuance could be partly absorbed by money market mutual funds, which are currently profuse in cash with more than $5trn invested in them. In that case, "the impact on broader financial markets would likely be relatively muted," Daniel Krieter, director of fixed income strategy at BMO Capital Markets said in a report to Reuters.