Reserves In The Balance As Treasury Set To Restart Bill Sales (2/2)

This week's agreement on suspending the Federal debt limit comes within days of the projected "x-date" and with under $50B of cash left in the Treasury's General Account (TGA) at the Fed. Attention turns to the Treasury's next move which will almost certainly include replenishing its coffers via high levels of net debt issuance.

• At the beginning of June, Treasury's refunding process assumed an end-of-September cash balance of $600B. The broad expectation is that Treasury will have to issue a net $900-1T of bills over the coming months to reach such a balance.
• As the TGA grows, usually system reserves fall, all else being equal, as private market participants buy government securities. Reserves currently stand at $3.2T. But funds parked in ON RRP, which exceed $2.6T, will play a key role as well.
• Because of the dearth of net bill issuance amid the debt limit crisis, financial institutions have ballooned the ON RRP facility. Much of the funds are expected to shift from ON RRP, which currently pays 5.05%, to bills, which pay at least 5.05% from each tenor from 45-day onward.
• Some analysts see reserve scarcity ahead, depending on whether money market funds see strong inflows, taking away from reserves, while simultaneously not participating too heavily in bill purchases. TD for instance sees $500B of RRP moving into bills, but that wouldn't be enough to prevent reserve scarcity (which they see at reserves <$2.8T). In a high reserve scenario they could see a $700B drop in RRP usage, with reserves staying at $2.9T.
• The next step is to see what Treasury announces for issuance throughout the coming month. They'd be likely to smooth issuance over the next few months so as to avoid market disruptions, but the cash-raising pace is still likely to be swift. It probably wouldn't be until well into the summer before there was any sign of reserve scarcity being a problem, but it bears watching.

Source: Fed, Treasury, MNI