The number of Treasury bills on hand will go down if the US has to take “extraordinary measures” in the next few weeks.
The fight over the U.S. debt cap could soon be felt most by investors who have cash on hand. If there isn’t a quick solution, the fight could get out of hand in the next few weeks.
In a previous deal, Congress put a stop to the $36.1-trillion U.S. debt ceiling and kept it in place until January 2025. Even though a deal was made at the last minute in December to keep the government open, it did not get rid of the threat of raising the debt limit.
In a letter to Congress in late December, Janet Yellen, the Treasury Secretary, said the U.S. could hit its new limit between January 14 and January 23. She said that if this happens, the Treasury will have to “start taking extraordinary measures” to pay its bills and other obligations.
Deborah Cunningham, chief investment officer for global cash markets at Federated Hermes and a veteran of the money market, said, “It’s going to have an effect.”
There was “some holdout hope” that Republicans would back getting rid of the U.S. debt ceiling completely, but Cunningham’s team was ready for drastic steps to be taken in the last two weeks of January.
The huge market for Treasury bills, a famous type of short-term government debt BX:TMUBMUSD01M, is where investors can see the most risk. BX:TMUBMUSD03M that is due in less than a year. The longer the disagreement over the borrowing cap lasts, the more damage is likely to be done to issuance. In the last two debt-ceiling standoffs, the chart below shows that the quantity of bills went down.
Less supply is important because T-bills have long been the lifeblood of the money-market fund business, which has grown from $4 trillion in 2020 to about $7 trillion today. People are moving their money into these funds because they want to get higher 4% to 5% yields on money-market funds, which mostly invest in T-bills, which are one of the safest and most liquid investments in the world. This is because several regional banks failed in 2023, taking money out of bank deposit accounts.
There are many good short-term investments that money-market funds can hold, but T-bills are the most common. Rules also say that the funds can only hold assets that will settle in 397 days or less, which limits what they can own. When demand for some assets goes up, yields tend to go down because yields move in the opposite direction of price.
Cunningham at Federated Hermes said that if the debt cap isn’t raised, the roughly $10 trillion market of T-bills that U.S. money-market funds could invest in could shrink by 30%, to about $7 trillion.
“What that does to rates is challenging,” she noted. “But ultimately, the impact of all portfolios is going to be marginally lower yields.”
What’s coming up
After the “red sweep” by Republicans in November, the stock market went through a huge jump.
But longer-term rates that are used to fund the economy have also gone through the roof. This is because people are worried that the second Trump administration’s plans for more tax cuts, tariffs, immigration restrictions, and other “pro-growth” measures could cause inflation to rise again and add to the U.S. debt load.
Donald Trump, the next president, told the press on Tuesday that the fight over the debt cap wasn’t about “raising a lot of money.” It’s just a matter of making it longer. I only need to see an extension.”
Amar Reganti, a fixed-income analyst with Hartford Funds, said that even though the end of the year is usually a tough time for markets, there have been no alarming signs of liquidity stress while the fight goes on.
He said that part of that was the belief that the U.S. government could keep running under extraordinary conditions until this summer, when the risk of a default, which was not seen as likely before, would become more important.
At the same time, the Treasury has a large amount of cash in the Treasury General Account at the Federal Reserve. This amount was around $677 billion at the beginning of January. In the last two debt-ceiling fights, it was used up, which added to the reserves in the banking system.
Another risk is that the “rebuild of the TGA” that would happen after the debt limit problem is fixed could quickly use up the system’s reserves, which could make funding markets unstable at that time, according to a client note from John Velis, a macro strategist at Bank of New York Mellon Americas. The stress could also make it hard for the Fed to reduce its balance sheet, he said.
But even though past debt-ceiling fights have caused “heartburn for capital markets” and Congress often waits until the “11th hour” to find a solution, Reganti at Hartford Funds said that the borrowing limit has always been raised.
Still, buyers who don’t want to take risks—those who help pay for the government—might take the biggest hit.
