Treasury Dynamics Could Play A Key Role In Reserves Trajectory (2/2)

Banking system reserves have fluctuated heavily over the past two months, but between ongoing QT and takeup of the Reverse Repo facility, sit about $1T below the Dec 2021 peak.

• One factor buoying reserves in recent weeks is the ongoing debt ceiling impasse, which has seen the Treasury’s General Account (TGA) at the Fed depleted to $68.3B as of Wednesday’s close, the lowest amount of the year and vs $316B at the end of May. All else equal, a lower TGA balance means more bank reserves, and vice versa.
• While the TGA will fluctuate in the weeks ahead, falling cash levels put focus on the Treasury’s warning that the “x-date” could arrive as soon as June 1.
• That said, an informal MNI client poll run earlier this week saw no respondents expect an outright default, with an 80/20 split between those expecting a short-term stop gap versus a long-term debt ceiling increase. And there's the potential for a near-term deal between Republicans and Democrats on raising the debt limit.
• If there is a resolution by early June, and the Treasury can resume borrowing, it’s expected to quickly replenish its cash pile by issuing sizeable amounts of T-Bills – with an end-of-June cash balance assumption of $550B (per the latest quarterly Refunding update), that could be on the order of a half-trillion quickly. Some analysts see the bill issuance running up to $1T in the coming quarters.
• Unless there is a sudden drop in takeup of RRP– which looks unlikely – reserves could drain out of the system quickly as the Treasury rebuilds its cash pile, putting renewed pressure on system liquidity.