Dollar-denominated funding markets are already facing myriad challenges that are distorting supply and demand, and these effects are only going to intensify as a return of the U.S. government’s statutory borrowing limit gets closer.
Rates for short-term dollar borrowing have been driven to zero and below, weighed down by Federal Reserve asset purchases, a drawdown of the U.S. Treasury’s mammoth cash pile and a shift from bank deposits to money-market funds. The reimposition at the end of July of the debt ceiling, which was suspended in 2019, is threatening to exacerbate this dynamic as its return also affects how much spare cash the Treasury can legally hold.
The reinstatement will force the Treasury to wind down its cash balance to levels near the previous suspension, or roughly $120 billion to $130 billion, from $924 billion now. That would push more cash into the market, while simultaneously yanking supply out of the market with bill paydowns.