WisdomTree Minds on the Markets
Minds on the Markets
Minds on the Markets
Archive: July 24, 2023
No Need to Call Roto-Rooter
Although it was only about two months ago, doesn’t the debt ceiling saga seem as if it occurred a lot longer ago? What was once the primary headline-maker for the financial markets quickly shifted to the annals of just another episode in what unfortunately has become a recurring development.
Although the 2023 version is now behind us, there were genuine concerns that the resolution could present its own set of problems, specifically in the funding markets, a.k.a., the plumbing of the financial system. The concern surrounded the U.S. Department of the Treasury’s need to rebuild their depleted cash balance. Due to the constraints imposed by the debt ceiling, Treasury needed to drawdown the funds in their Treasury General Account (TGA) to help pay the bills. For the record, TGA is the federal government’s ‘bank account’ held at the Fed.
In order to build up the Treasury’s cash balance, new issuance would need to increase accordingly. Traditionally, the nation’s debt managers utilize the T-bill sector as their work horse. To provide some perspective on the amounts involved, one needs to turn to the dollar levels that not only typically exist within the TGA, but also where did they drop to during this year’s debt ceiling episode. Prior to the debt ceiling being reached in January of this year and Treasury implementing its ‘extraordinary measures,’ the TGA was sitting at $447 billion to end 2022. By the time these extraordinary measures had been almost all used up at the end of May, the TGA had plummeted to only $23 billion, matching the low-water mark last seen in 2015.
Typically, Treasury likes to keep somewhere between $500 and $600 billion in the TGA to act as a buffer. In fact, in May of 2022, the cash balance was as high as $854 billion. Needless to say, the debt managers had a lot of catching up to do once the debt ceiling deal went into effect this time around. In the immediate wake of this resolution, Treasury was targeting a cash balance of $425 billion by the end of June, or more than $400 billion above where the low point was for TGA on June 1. For the record, this goal was essentially achieved, and as of July 19 (latest data available), the federal government’s cash balance had risen to $537 billion.
Back to that T-bill issuance. The $500 billion increase in the TGA, as of this writing, has been the result of rather large increases in the amounts of T-bills being issued during this timeframe. The amount of four-week bills being auctioned each week has doubled to $70 billion, while the eight-week has been ratcheted up by $25 billion. The three-, four- and six-month T-bill amounts have all been boosted since late May as well. All told, the net issuance of T-bills rose more than $700 billion since the beginning of June.
This flood tide of new issuance in such a relatively short period of time heightened anxiety that dislocations and a potential scarcity of bank reserves could occur in the funding markets. However, as we write this edition of Minds on the Markets, things have gone rather smoothly. Indeed, looking at various measures of the funding markets, it appears that up to this point, the plumbing is fine, and hopefully, with the lion’s share of the debt managers’ work arguably done, another negative headline issue has been avoided.
For more information, contact your WisdomTree representative or visit WisdomTree.com/investments.
To obtain a prospectus containing this and other important information, please call 866.909.9473, or visit WisdomTree.com/investments to view or download a prospectus online. Read the prospectus carefully before you invest. Past performance does not guarantee future results. Important Risk Information: There are risks associated with investing, including possible loss of principal. Foreign investing involves currency, political and economic risk. Funds focusing on a single country and/or sector and/or funds that emphasize investments in smaller companies may experience greater price volatility. Investments in emerging markets, real estate, currency, fixed income and alternative investments include additional risks. Please see prospectus for discussion of risks. This material contains the opinions of the authors, which are subject to change, and should not be considered or interpreted as a recommendation to participate in any particular trading strategy or deemed to be an offer or sale of any investment product, and it should not be relied on as such. There is no guarantee that any strategies discussed will work under all market conditions. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This material should not be relied upon as research or investment advice regarding any security in particular. The user of this information assumes the entire risk of any use made of the information provided herein. Kevin Flanagan and Jeff Weniger are Registered Representatives of Foreside Fund Services, LLC. WisdomTree Funds are distributed by Foreside Fund Services, LLC.