The U.S. Capitol is seen on a sunset Wednesday, May 31, 2023, at Capitol Hill in Washington. (AP Photo/Jose Luis Magana)
NEW YORK: Wall Street is already starting to game plan for the US government’s next debt-ceiling standoff, looking ahead to the US Treasury’s estimated cash balance for clues on how much bill supply will be coming down the pipeline.
The Treasury today will release estimates for federal borrowing and cash balances through September and the October-to-December period, possibly indicating how much it might have to reduce its store of funds before the debt limit will be reinstated on Jan 2.
A larger cash pile means that the department can keep its bill supply intact, while a smaller buffer would require reductions in bill issuance.
Normally, the Treasury has to shrink its pile of cash as the deadline approaches, as mandated by legislation. Until 2021, this meant reducing the cash balance, known as the Treasury General Account or TGA, to the lowest point reached during the previous confrontation.
Those occasions resulted in a significant reduction of bill supply before the United States came close to exhausting its borrowing capacity.
But a Justice Department memo re-released in April argued the language used in past debt-limit suspension bills gives the Treasury room to manage its cash balance according to prudential practices, though it doesn’t allow the government to boost its buffer heading into the reinstatement.
“This is an unsettled question,” Wrightson ICAP economist Lou Crandall wrote in a weekly note to clients.
“The Justice Department appeared to sign off on an ‘adequate’ cash balance but was silent on whether the Treasury could hold an ‘ample’ cash buffer.”
Once the debt ceiling is reinstated at the start of next year, the Treasury can take a series of extraordinary measures to avoid exceeding the cap as quickly as it might otherwise do. These include slashing the amount of T-bills it issues, spending cash parked at the US Federal Reserve and suspending investments of government trusts.
During last year’s debt-ceiling standoff, the Treasury was able to stretch cash balances and those measures until the first week of June after the US deficit hit the statutory limit of US$31.4 trillion in January 2023.
Wrightson had initially thought Treasury might be forced to adopt a “more restrictive interpretation” of its cash management policy and estimated a US$600bil year-end level. But the firm has since shifted the other way, now expecting a TGA of at least US$800bil, pushing off the so-called drop-dead date to the summer.
This would give politicians, regardless of the outcome of this year’s elections, more time to work out an agreement. The cash balance stood at US$768bil as of July 25.
Other Wall Street strategists still anticipate some sort of reduction based on the ambiguity of the memo. Societe Generale has interpreted the Justice Department’s guidance that Treasury can likely hold an amount that’s in line with one week of expected outflows – about US$550bil – and that’s where they see the TGA by year-end.
Yet some, like Citigroup, warned that anywhere from US$550bil to US$750bil is reasonable to expect.
Deutsche Bank sees US$650bil as a reasonable cash balance “in today’s setting”, strategists Steven Zeng, Matthew Raskin and Brian Lu wrote in a report this week.
“This number is US$200bil smaller than what we would expect in the absence of debt ceiling influence, and it would be achieved through a commensurate reduction in bill supply late in the year,” they said. — Bloomberg
