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The Treasury Department is set to keep bond sales steady through the end of the year with little need to boost cash on hand as Washington delays comprehensive fiscal relief, former officials told MNI, but they added that a stimulus next year could draw down the cash balance while nearly doubling banking system reserves.
For the moment, Washington leaders have given up trying to agree on a comprehensive fiscal stimulus package, but are also signaling another try after the elections. Relief measures could be tied to funding legislation that has to be passed by Dec. 11 to avoid a government shutdown.
The stimulus delay "certainly leads to lower net bill supply than we would have otherwise expected," said Jon Hill, a former debt manager at the Treasury Department now at BMO Capital Markets. The Treasury's quarterly debt plans to be unveiled Nov. 4 will likely refrain from changes to Treasury bond issuance and instead "emphasize the importance of the bill market."
"Treasury has a very elevated cash balance at nearly USD1.7 trillion and that reflects funding for the next stimulus package, cash for week-to-week operations, and remaining unspent stimulus funds, he said. Standard Treasury operating procedure is to hold USD400 billion in funds, and with USD500 billion in small business PPP loans to be forgiven, that leaves Treasury with roughly USD800 billion of "unencumbered cash" at present to fund the next stimulus, sources said.
"Treasury supply is in a bit of a holding pattern for the moment," said Mark Cabana, a former New York Fed official now at Bank of America. Bills for the next few months will be at "net zero to modestly lower."
Treasury is unlikely to add to the size of its coupon auctions in the near term and will keep its cash balance high, he said. "To bring it down Treasury would have to cut bill supply pretty materially" and there isn't much benefit should a stimulus materialize in the medium term.
Even without a stimulus in the next few weeks, the Fed's asset purchase program will help push the fed funds rate down in the months ahead, Cabana said. But with a stimulus sending reserves into markets, the Fed will likely have to hike IOER next year, possibly by 5 basis points.
The reserves unlocked by a stimulus "will overwhelm any type of supply impact," Cabana said.
Reserves could hit USD3.3 trillion by year-end, from USD2.7 trillion currently, he said. A stimulus would send reserves to over USD5 trillion by June, as the Treasury cash balance comes down to normal operating levels, he projected. By the end of July next year, the Treasury cash balance will have to dip again to USD133 billion to comply with the U.S. debt limit.
The debt limit in 2019 was not actually raised, only suspended, and "Treasury has legally interpreted it as they can issue to fund expenditures and operations but not raise cash," said Hill, the former debt manager.
"Whatever the [Treasury General Account] was when it was suspended is where the TGA should be when it comes back into force," Hill said. "That is going to present a whole number of problems in the second half of next year."
The Treasury will likely have to "sharply drop" its cash balance to hit the target in late July, and as the debt limit is reinstated, Treasury will then ramp up the cash balance again through a surge in bills, he said.Unless Congress acts beforehand to adjust the debt limit, Treasury will have to get its cash balance lower, Cabana said, "which will mean more reserves in the banking system, more downward pressure on money market rates, and there is a stronger case for an IOER adjustment higher."