The Great Re-Funding: Is the Treasury About to Break the Market?

Issue 66

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Today’s Bullets:

• The Treasury General Account

• How much does the Treasury need?

• Reserves and Repos

• Positioning for the Risk

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Inspirational Tweet:

The debt ceiling issue is resolved, so the US Treasury will not default on its debt and it can pay all its obligations to various programs and contractors, etc.

Crisis averted. All is good right?

Right?

Wrong….maybe.

Because now that the Treasury has been approved for a larger line of credit, it has to fill the piggy bank back up again. Like a hoover vacuum, The Treasury is about to suck up market liquidity all around it. And by the estimates of Goldman Sachs and JP Morgan, to the tune of over $1 Trillion.

Oink, oink. 🐷

But where is all that cash going to come from? And what will be the impact to the markets when the vacuuming begins?

Excellent questions that many people have started to ask recently. Ones that could impact your portfolio and its performance, too. So, this is a super important topic today.

Let’s unpack all this nice and easy, as always, and get some answers, shall we?

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😵 The Treasury General Account

We’ll start at the top here and explain the Treasury General Account. Like it sounds, and you may have guessed, this is basically the US Treasury’s checking account.

Where it holds cash and pays its bills.

If you’ve been watching the debt ceiling drama, you may have also noticed that the account balance has fallen to a precipitous level. Dangerously close to the point of being overdrawn.

Except unlike a checking account at a bank, there is no overdraft protection for the TGA. Once it hits zero, there’s no courtesy call and $30 convenience fee, it’s simply game over.

The Treasury defaults.

So, thank God for the heroics of Congress, the Senate, and the White House, all rushing to Janet Yellen’s distress signals from the last few months. 🙄 🤡

Seriously, could these dimwits have waited any longer to act?

Literally waiting until the last days before the Treasury becomes insolvent.

In any case, the clown car arrived in time, and the Treasury is ready to turn the spigot back on and refill its coffers.

But how much liquidity do they need, and where will it all come from?

Some people assume it’ll come from bank reserves and the massive reverse repo balances banks have been sitting on. But it’s a bit more complicated than that, so let’s investigate.