Is there a liquidity wave coming?
Today, the United States has officially reached the national debt ceiling.
This may force the Treasury to start using funds from the General Treasury Account (TGA). And this, in turn, can lead to an injection of liquidity into the markets. But it's not that simple.
Here's what's going on and what to expect:
How it all started
On January 21, the United States will reach the national debt ceiling of $36 trillion. This means that the Treasury will no longer be able to raise new debt until a new solution is agreed upon — usually raising or suspending the ceiling.
But this does not mean that default will occur immediately. The Treasury has so-called "emergency measures" that allow it to hold out until lawmakers come to an agreement.
One such measure is the use of funds from a treasury account with the Federal Reserve System (TGA). Currently, there is about $650 billion in this account.
When money is deposited on TGA, it is as if it is "taken out" of the market. But as soon as they start spending them, they come back — that is, there is actually an infusion of liquidity.
In the past, such spending of TGA funds coincided with an increase in the value of assets. For example, the decrease in TGA in 2022/2023 helped to stop the bear market.
Moreover, some believe that such episodes with the debt ceiling and TGA spending have an even greater impact on the market than quantitative easing (QE), because no new debt is issued during this period.
What does it mean now:
1. Debt ceiling discussions tend to drag on.
2. This forces the Treasury to use TGA immediately.
3. This leads to a significant and rapid injection of liquidity.
But there are nuances that need to be considered.:
1. Will the negotiations be prolonged?
The debt ceiling is often used as a pressure tool: one side pulls to the last to achieve its goals.
This time, the situation is different — Republicans control Congress, and conflicts are likely to be within their party. But there is a part of the Republicans that wants to show its tough stance on the growing debt. This can delay the process.
2. What are "emergency measures"?
The use of TGA funds is only one of the measures. The Treasury may temporarily suspend investments in certain funds, such as the Civil Service pension fund.
If all other measures are used first, TGA spending may be delayed for 1-2 months.
3⃣ The impact on liquidity will be mixed
If TGA starts to be spent, it may be accompanied by a decrease in the issue of Treasury securities (T-bills). This, in turn, may push money markets to increase investments in the reverse REPO operation, which acts as an outflow of liquidity.
The result will be a push—pull dynamic: an infusion through TGA, but an outflow through REPO.
4⃣ TGA will still have to be replenished
When the debt ceiling is raised, the TGA will need to be restored, which will create the opposite effect — an outflow of liquidity.
🔮 Prediction:
Here's how things can develop.:
1. TGA's balance sheet will grow to $750-800 billion by the end of January due to seasonal factors (liquidity outflow).
2. TGA spending will begin in mid–February - March (liquidity injection).
3. In April, the tax payment season will temporarily stop spending (outflow of liquidity).
4. In the summer, the TGA will be depleted to almost zero when an agreement is finally reached.
This cycle can create serious waves of liquidity in the market.