(Bloomberg) – President Joe Biden’s signing of legislation suspending the federal debt ceiling gave the Treasury Department the green light to resume net issuance of new debt after months of disruption.
Bloomberg’s Most Read
Since mid-January, when it hit the $31.4 trillion debt ceiling, the Treasury has used special accounting measures to maintain payments on all federal bonds. Only $33 billion remained available as of May 31.
It also reduced its cash balance, which fell below $23 billion on June 1 — a level considered by experts to be dangerously low given the volatility of day-to-day federal revenues and payments.
The bill Biden signed on Saturday suspended the debt ceiling until Jan. 1, 2025, allowing the Treasury to rebuild its cash flow to more normal levels. Early last month, the department had listed a cash level of $550 billion for the end of June. A growing budget deficit is also pushing the Treasury to increase its borrowing.
Read more: CBO raises US budget deficit estimate for 2023 to $1.5 trillion
Debt auctions are now expected to swell. The replenishment process – which could involve well over $1 trillion in new securities – could have undesirable consequences, 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. estimated that the wave of issuance could have the same economic impact as a quarter-point hike in interest rates by the Federal Reserve.
Auction announcements will offer investors guidance on how quickly the Treasury will ramp up issuance. On Thursday, the department said it plans to increase the size of three-month and six-month upcoming bill offerings by $2 billion each over the coming week. It has also already stepped up its issuance of four-month debt, its new benchmark for bills.
The four- and eight-week auctions, meanwhile, have room to grow after being cut to $35 billion each for each weekly issuance cycle.
Extraordinary measures
Meanwhile, the removal of the debt ceiling will prompt officials to undo the emergency accounting maneuvers they used to make additional funds available after the Treasury reached 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, such as the Thrift Savings Plan Government Securities Investment Fund for federal employees.
In recent months, the Treasury had suspended the issuance of these securities while continuing to collect the cash entering these funds.
–With the help of Benjamin Purvis.
Bloomberg Businessweek’s Most Read
©2023 Bloomberg LP