President Joe Biden’s signature of legislation suspending the federal debt ceiling has given the Treasury Department the green light to resume net new debt issuance after months of disruption.
Ever since mid-January, when it hit the $31.4 trillion debt ceiling, the Treasury has been using special accounting measures to maintain payments on all federal obligations. There were just $33 billion of those left available as of May 31.
It’s also been running down its cash balance, which dropped below $23 billion on June 1 — a level seen by experts as dangerously low given the volatility in day-to-day federal revenues and payments.
The bill Biden signed Saturday suspended the debt limit until Jan. 1, 2025, allowing the Treasury to rebuild its cash to more normal levels. Early last month, the department had penciled in a $550 billion cash-balance level for the end of June. A widening fiscal deficit also puts pressure on the Treasury to step up borrowing.
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Debt auctions are now set to swell. The replenishing process — which could involve an amount well in excess of $1 trillion in new securities — could have unwanted consequences, by draining liquidity from the banking sector, raising short-term funding rates and tightening the screws on an economy that many economists see headed for a recession.
Bank of America Corp. has estimated the issuance wave could have the same economic impact as a quarter-point interest-rate hike by the Federal Reserve.
Auction announcements will offer investors guidance on how quickly the Treasury will go about stepping up issuance. On Thursday, the department said it planned to bolster the size of upcoming three-month and six-month bill offerings by $2 billion apiece in the coming week. It has also already been ramping up its issuance of four-month debt, its newest bill benchmark.
Four- and eight-week auctions, meanwhile, have room to grow after being reduced to $35 billion each for each weekly issuance cycle.
Extraordinary Measures
Meantime, the removal of the debt ceiling will prompt officials to undo the emergency accounting maneuvers they used to make extra funding available after the Treasury had hit the limit.
The unwinding maneuvers will have no impact on borrowing from the public, however, since the process involves issuing nonmarketable securities to certain internal funds, like the Thrift Savings Plan Government Securities Investment Fund for federal employees.
For the past several months, the Treasury had halted the issuance of those securities while continuing to collect the cash coming in to such funds.
--With assistance from Benjamin Purvis.
