Treasury’s Record Cash Pile Is Jerome Powell’s $700 Billion Headache

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The U.S. Treasury is sitting on a near-record $1.5 trillion pile of cash, and what it does with it has become the biggest wild card for funding markets as quarter-end approaches.

The department’s initiative to ensure it always has enough money on hand to pay its bills is once again making it harder for the Federal Reserve to gauge how reserves in the banking system will unfold at a crucial juncture.

That’s because swings in the government’s cash on deposit at the Fed have a direct impact on the level of reserves — effectively draining bank reserves as the amount climbs. And the sheer size and volatility of the Treasury’s buffer have increased along with federal deficits that are swelling because of pandemic-triggered stimulus spending. With the Treasury issuing bills faster than it can spend the cash, that pile has kept growing.

This dynamic is taking on added meaning before quarter-end, with strains in the banking system already appearing to build in the lead-up to June 30. The big question now is whether the Treasury will stick to its end-of-June cash-balance target of $800 billion — about $700 billion below its current level.

Shrinking the balance would help ease any quarter-end stress by adding liquidity to the banking system. But the uncertainty is complicating decisions for participants in this key segment of financial markets — from managers of money-market funds, to hedge funds using it to generate liquidity through repurchase agreements.

“It’s like the $700 billion gorilla in the room,” said Jon Hill, a strategist at BMO Capital Markets. “The Treasury has created a multi-hundred billion dollar level of uncertainty for the Fed’s balance sheet going into quarter-end. This is one of, if not the biggest, question over the next three weeks on how the front end plays out with regard to liquidity conditions.”

Treasury Secretary Steven Mnuchin said Thursday that more money is about to flow out of the government’s coffers. Of the roughly $3 trillion of pandemic relief, about $1.6 trillion has been used, and “we’re busy working on disbursing the rest of the money,” he told reporters in a video conference.

“There’s a lot of money that hasn’t been allocated” yet, and over the next month $1 trillion will be pumped into the economy, he said.

Quarter-End Focus

For funding markets, that still leaves questions about the exact trajectory between now and quarter-end.

To be sure, the Fed under Chairman Jerome Powell is adding liquidity, and creating reserves, with its asset purchases. It pledged Wednesday to keep the pace of its buying at about $80 billion a month for Treasuries and around $40 billion for mortgage-backed securities. But BMO’s Hill said that given the Treasury’s cash account dwarfs those sums, its effect on bank reserves could still be profound.

The central bank began buying longer-term Treasuries and agencies in March to keep markets functioning smoothly as the virus’s spread sparked turmoil. Since then, the Treasury has issued more than $2 trillion of bills, supply that isn’t included in Fed purchases. While investors have been able to absorb the barrage of debt with relative ease, signs of funding dysfunction are starting to emerge.

The spread between yields on three-month Treasury bills and overnight index swaps, which measures the health of a key part of the government debt market, is near the widest level since April. Persistent outflows from government money-market funds could reduce investment in T-bills and repurchase agreements, forcing rates even higher. Those funds have shed cash the past four weeks.

Checking Account

The Treasury General Account, as it’s known, operates like the government’s checking account at the Fed. When Treasury increases its cash balance, that’s on the liability side of the Fed’s balance sheet, so as that goes up, it drains reserves from the system (and vice versa).

Fluctuations in the account were linked to some of the forces that caused dislocations in the repo market in September and forced the Fed to step in and provide liquidity.

Treasury in 2015 instituted a policy of keeping at least five days’ worth of expenditures, or a minimum of $150 billion, in the account in case unexpected disruptions locked it out of debt markets. Before that, Treasury kept enough cash for just two days. As budget deficits have begun to soar, the size of that buffer has grown.

Steven Zeng, a strategist at Deutsche Bank AG, considers it unlikely that government outlays will prove large enough by month-end to drive the cash balance below about $1 trillion.Keeping the extra cash on hand will also allow Treasury to capitalize on having tapped the money already at very low rates.

“It’s not that the money won’t be spent, it’s just a matter of the timing,” he said.

This article was originally posted on

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