A wave of liquidity
24 February 2021
U.S. Treasury to release a great wave of liquidity
The U.S. Treasury operating balance is used to ensures enough liquidity is available to cover urgent needs if refinancing markets should come to a sudden stop. After a rapid expansion due to COVID-19-related measures, Treasury is now targeting a reduction in its total operating balance, from the current $1.6tn to $800bn by the end of March and $500bn by the end of June.
- Practically releasing more than $1tn in cash over the next few months.
Compounding or diluting the next stimulus plan?
Biden is proposing a $1.9tn stimulus plan. If the stimulus plan gets fully approved, the spending will actually « help » the treasury reduce its operating balance. But using the available operating balance to execute the expenditure of the stimulus plan may reduce its financial impact.
- Reduced money creation, as it will only be a transfer of existing funds.
- The transfer will be mainly towards economic operators (taxpayers) who will have limited access to leverage for these funds.
A supply squeeze in T-bills?
If the stimulus plan will not be fully approved, the U.S. Treasury is likely to reduce the issuance of short-term bills (0–3 months), reversing last few months’ extra-issuance. The resulting supply squeeze may impact the short side of the yield curve, pushing interest rates even lower.
- T-bills usually represent ~20% of overall debt but currently are at 24%.
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