The US government borrowed another 1,000 billion dollars and this is supposed to increase the pressure on the banking system.
US government borrowing since 1,000 billion dollars should increase the pressure on the banking system of the country, writes “Financial Times”. The main concern expressed by analysts is that it would the volume of new issues raised yields on government debt, draining cash from bank deposits.
After resolving the dispute over the debt ceiling, the Ministry of Finance will seek to restore its cash balance, which last week reached its lowest level since 2017. “JP Morgan” estimated that Washington must borrow $1.1 trillion in short-term Treasuries by the end of 2023, with $850 billion in net issuance over the next four monthsa.
“Everyone knows the flood is coming. Government bills will further become cheaper and this will put pressure on the banks“, He said investment fund strategist Gennady Goldberg.
He said he expects the largest increase in Treasury issuance in history, except during crises such as the 2008 financial meltdown and the 2020 pandemic. Analysts say the notes will have maturities of a few days to 12 months.
“Yields have already started to rise in anticipation of increased supply“, he added investment expert Gregory Peters.
The change increases pressure on deposits at US banks, which have already fallen this year, as rising interest rates and the failure of regional lenders have forced clients to seek higher-yielding alternatives. Further withdrawals from deposits and rising yields could in turn force banks to offer higher interest rates on savings accounts, which could be particularly costly for smaller lenders.
“Rising yields could force banks to raise their deposit rates” said Peters.
Analysts believe that the new borrowing by the Ministry of Finance “could worsen the stress that already exists in the banking system”. The shock offer comes as the US Federal Reserve is already selling its bonds, while until recently it was a big buyer of government debt. Experts point out that there is already a significant budget deficit, and that the sudden issuance of government bills would probably cause turbulence on the market in the months ahead.
Bank clients have already largely shifted to money market funds that invest in corporate and government debt after the bank failures this spring. But while money market funds are typically big buyers of Treasuries, analysts say they are unlikely to buy the entire offering. That’s largely because money market funds already earn a generous risk-free return, currently 5.05 percent annualized, on overnight funds left with the Fed. This is slightly below the 5.2 percent available at the comparable Treasury rate, which carries more risk.
Currently, about $2.2 trillion a day is put into the Fed’s Reverse Repurchase Mechanism (RRP), mostly from money market funds.. That cash could be redeployed to buy Treasuries if they offered significantly higher yields than the Fed’s funds, analysts say. But the RRP rate adjusts to interest rates. So, if investors expect the Fed to continue to tighten monetary policy, they are likely to keep their money in the central bank instead of buying bonds.
“While money market funds with access to RRP may purchase some Treasuries on margin, we believe this is likely to be small relative to other types of investors such as corporates, bond funds without access to RRP facilities and foreign buyers.“, he wrote in a note Jay Barry, from JP Morgan.