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Economists predict the US Treasury’s forthcoming debt issuance will hit $1 trillion and may eventually cause economic stiffness.
US President Joe Biden’s assent and signing of the bill suspending the federal debt ceiling will trigger new debt issuance. Already, observers expect the Treasury Department to sell $1 trillion worth of debt.
On Saturday, President Biden officially signed the bill, which removed the US debt ceiling until Jan 1, 2025. Biden’s signature followed a relatively hurried process of deliberations and votes in the House of Representatives and the Senate. The Senate approved the bill and sent it to Biden only a few days before the official default would have set in today. Before the approval, the US debt ceiling was $31.4 trillion.
The Treasury Department hit the debt ceiling in January and has been applying other methods to meet financial obligations. According to a letter Treasury Secretary Janet Yellen sent to House Speaker Kevin McCarthy in January, “extraordinary measures” were necessary until further notice. A CNN report specified that these measures include suspending reinvestments of certain funds and selling current investments. The Treasury Department could then begin performing its federal obligations using these funds. However, as of May 31, these extra funds remained only $33 billion.
Effect of US Debt Ceiling Increase and Debt Issuance
Although the Treasury got by, it must now return the funds used. In addition, the law requires the Treasury to pay interest for the period. Any measures taken could worsen its financial outlook, especially as it estimates a cash balance of $550 billion by the end of this month.
The Treasury is now likely to sell debt auctions worth more than $1 trillion. According to economists, this move could lead to a recession for several reasons. Firstly, the Treasury would be in the same pool for cash as banks, which could affect lenders’ funding rates. Eventually, lenders transfer these costs to households and businesses.
According to Bank of America Corp, the economic weight of this occurrence from US debt issuance would equal a Fed interest-rate increase of 25 basis points. This would also affect Treasury Bills as short-term yields would likely fall. However, according to Wisdomtree Investments head of fixed income strategy Kevin Flanagan, the fall might not be terribly steep. He said:
“There will be a knee-jerk reaction in T-bills as that area of the market has borne the burden of uncertainty. So yields come down from their highs, but because the Treasury will increase issuance, there is a floor in yields for that market.”
Morgan Stanley short-term interest rate strategist Efrain Tejeda’s forecast for the issuance of Treasury Bills is $730 billion sometime in the next three months. Also, Tejeda’s forecast for December puts issuance at $1.25 trillion.
The Treasury expects its General Account to hit $550 billion at the end of this month and climb by another $50 billion in September.