Finally, two sides agreed to a deal on the debt ceiling issue. Tha main part of the agreement is that there'll be a two-year suspension on the debt ceiling. The ceiling is the cap for the amount the government ia llowed to borrow. Suspending that cap for two years implies that the US government will be able to borrow funds and to repay its liabilities on time. Now that the deal is here amd the default is averted, there can (and most certainly) will be a spending spree by the government which will issue about $1 trillion in new debt until the year end. So, what this means for the financial markets?

To understand how this may impact markets, we should first look at repo markets, the backbone of our financial system. 

The repo market is the heart of the financial system. It is the market where cash that financial institutions have and Treasury securities meet.

Large financial institutions, such as banks and brokers / dealers can fund their operations in multiple ways. They can borrow from other banks or issue debt. Or they can choose a cheaper option which is the repo market. Repo or repurchase agreement is an agreement to sell securities to buy them later at a higher price.

You can think of a repo as a short-term collateralized loan.

Dealers (or banks) have a huge amount of Treasury bonds on their balance sheet which they lend to institutions with lots of cash. After a short period of time, dealers purchase their securities at a higher price from their counterparties. The difference between the sale and repurchase price is the repo rate. Both parties benefit from the repo market.

Broker-dealers need funding, thus they lend securities that otherwise sit idle on their balance sheet. They fund themselves in a cheaper way. Institutions with lots of cash take those securities as collateral. They provide liquidity to dealers and earn interest without much risk because their collateral is usually Treasury bills. Repo market is the main source for dealers to fund themselves.

To read more about repo markets go to:

https://www.publish0x.com/bringing-us-treasurys-onto-the-chain/what-is-the-repo-market-xqejxro

There's also a reverse repo market in which banks post cash in exchange for treasuries. This is a market allowing financial institutions to earn yield on their cash. It's a short-term, overnight program.

Now the fear is that with the debt ceiling deal the liquidity will be sucked out of financial markets, and will flow from reverse repo markets to Treasury bills. That can be more than $1 trillion! Think about it. More than a trillion dollar will leave the backbone of the financial system and will go to Treasuries. What exacerbates the situation is that reverse repo is an overnight program while Treasury bonds are not. The funds that changed money during a short-term period of time will be lent to the government for longer duration. It almost certainly will have an effect on the markets. And a huge one I think.