The US Treasury Sets Target to Add $350 Billion in Cash by End of June Following Debt Ceiling Standoff
The US Treasury announced its plan to increase T-bill issuance in order to rebuild its depleted cash balance resulting from the recent debt ceiling standoff. The aim is to add approximately $350 billion to the cash on hand by the end of June.
After utilizing extraordinary measures to fund the government due to reaching the $31.4 trillion debt limit earlier this year, a recent agreement between the White House and Congress to suspend the cap until January 1, 2025, enables the Treasury to replenish its operating account, which had reached near-record lows last week.
As of Monday, the Treasury held $71.2 billion in its account at the Federal Reserve, known as the Treasury General Account (TGA). Prior to the bipartisan agreement to lift the debt ceiling, the account had dropped to below $23 billion on June 1, narrowly averting a first-ever US default.
The Treasury outlined its plan to gradually rebuild the cash balance to a level consistent with its policy, targeting an end-of-June cash balance at the Fed of approximately $425 billion. This requires adding around $350 billion to the TGA over the next three weeks. The Treasury plans to increase bill supply and anticipates a surge in quarterly tax receipts starting from June 15 to achieve this goal.
The new cash balance target falls $125 billion short of the $550 billion projection made in its borrowing estimates on May 1 for the end of June. However, with the debt ceiling issue now resolved, the Treasury remains confident in reaching its end-of-September target of $600 billion.
Market participants have been eagerly anticipating the Treasury’s plan, as the rapid cash rebuild will impact overall market liquidity due to increased debt issuance. To attract investors, Treasury is likely to offer higher interest rates on new issuances, potentially leading banks to raise deposit rates to prevent further loss of deposits, which have been affected by recent bank failures.
This cash influx may also exert downward pressure on other liabilities, such as bank reserve balances held at the Federal Reserve. As the Fed implements its quantitative tightening program, draining cash from the financial system, any growth in the TGA will need to be offset by a corresponding decline in liabilities, potentially affecting bank reserves or overnight reverse repurchase agreements.
