25 February 2024

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Joe Biden's debt-bill signing

Joe Biden’s debt-bill signing set to trigger a wave of US debt sales

After months of disruption, US President Joe Biden‘s debt-bill signing on legislation suspending the federal debt ceiling has given the Treasury Department the green light to resume net new debt issuance.

The Treasury has been employing special accounting procedures to continue payments on all federal obligations since mid-January, when it reached the $31.4 trillion debt cap. As of May 31, there were only $33 billion left available.

It has also been decreasing its cash reserves, which fell below $23 billion on June 1 — a level considered dangerously low by analysts given the volatility of daily federal receipts and payments.

The measure signed by Biden on Saturday extended the debt limit until January 1, 2025, giving the Treasury time to replenish its cash reserves to more normal levels. Early last month, the agency projected a $550 billion cash balance at the end of June. A growing fiscal deficit puts pressure on the Treasury to increase borrowing.

Debt auctions are on the rise. The replenishment process, which could involve well over $1 trillion in new securities, could have unintended consequences, such as draining liquidity from the banking sector, raising short-term funding rates, and tightening the screws on an economy that many economists believe is headed for a recession.

Joe Biden's debt-bill signing

According to Bank of America Corp., the Joe Biden’s debt-bill signing issuance tsunami might have the same economic impact as a quarter-point interest-rate hike by the Fed.

Auction announcements will provide investors with insight into how rapidly the Treasury will ramp up supply. The Treasury Department announced on Thursday that it would increase the size of its three-month and six-month bill offers by $2 billion each in the coming week. It has also begun to increase its issuance of four-month debt, its newest bill benchmark. 

Meanwhile, four- and eight-week auctions have opportunity to expand after being limited to $35 billion each weekly issuance cycle.

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Joe Biden’s debt-bill signing takes extraordinary measures

Meanwhile, the removal of the debt ceiling will force officials to reverse the emergency accounting manoeuvres they employed to provide more cash after the Treasury reached the limit.

The unwinding manoeuvres, however, Joe Biden’s debt-bill signing will have no effect on public borrowing because the process entails issuing nonmarketable securities to some internal funds, such as the Thrift Savings Plan Government Securities Investment Fund for federal employees. 

The Joe Biden’s debt-bill signing had paused the issuing of those securities for several months while continuing to collect the cash flowing into such funds.

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