On May 29, after reaching a debt agreement, the U.S. Treasury Department is expected to replenish its cash balance soon. According to recent estimates, it is expected to issue $1 trillion in treasury bills by the end of the third quarter.
The financial system was already showing signs of stress as the Federal Reserve raised interest rates and shrunk its balance sheets, leading to the collapse of several U.S. banks.
If the Ministry of Finance aggressively issues treasury bills or withdraws a large amount of liquidity from the financial market, the financial system that is already under pressure will be even worse.
At that time, the U.S. Treasury Department will compete with banks in the capital market, and short-term financing rates for banks may rise, which will have to increase the cost of borrowing for businesses and households.
Analysts at Bank of America estimated that if the Treasury Department issued large-scale treasury bills, the impact on the economy would be equivalent to the Fed raising interest rates by 25 basis points, and traders expect the Fed to raise interest rates by 25 basis points before the end of July.
That way, while easing debt-ceiling fears could push short-term U.S. Treasury yields lower, the decline in yields will be limited as investors begin to assess what’s next.