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.