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NEW YORK (Reuters) – The United States’ debt ceiling will be reinstated at the end of July, placing pressure on the Treasury to lower its cash balance before the deadline. That means further cash injections into a financial sector already awash in liquidity, potentially lowering short-term rates and producing undue turbulence in money markets.FILE PHOTO: A bald eagle atop the US Capitol. The front of the Federal Reserve building in Washington, July 31, 2013. On Wednesday, nearly a trillion dollars in cash poured into the Federal Reserve’s reverse repo (RRP) facility, setting a new high. On Thursday and Friday, reverse repo volumes fell to $742.6 billion and $731.5 billion, respectively.The record volume came after the Fed last month made a technical adjustment to the interest rates it manages, raising the ra. The Federal Reserve introduced the reverse repo program (RRP) in 2013 to absorb excess cash in the repo market and provide a hard floor under its policy rate, or effective fed funds rate, which is currently set at 0% to 0.25 percent. WHAT IS THE RELATIONSHIP BETWEEN THE CASH SURGE AND THE DEBT CEILING? Eligible counterparties lend cash to the Fed in exchange for Treasury collateral on an overnight basis.WHAT IS THE RELATIONSHIP BETWEEN THE CASH SURGE AND THE DEBT CEILING? Due to the Fed’s asset purchases as part of quantitative easing and the U.S. government shutdown, the market is presented with an abundance of cash in the banking system. Treasury’s financial assistance to the economy in the wake of the pandemic. Before a two-year debt ceiling suspension ends on July 31, Treasury must reduce its cash balance in the Treasury General Account (TGA) deposited at the Federal Reserve to a $450 billion objective. According to Wrightson ICAP statistics, the Treasury had a cash balance of $711 billion as of June 29.A TGA cut enhances banking sector reserves, which have now poured into the RRP market.ARE SURGING REVERSE REPO VOLUMES A CONCERN? The RRP’s hike may lower the demand for U.S. Treasury bonds among money market funds. Treasury bills are preferred because their interest rates are set at historically low levels. For example, rates on 3-month T-bills in the United States are currently hovering around 0.05 percent. According to Zoltan Pozsar, global head of short-term interest rate strategy at Credit Suisse, the transition from bills to RRPs will take time because bills are currently underwater, meaning they can only be sold at a loss.”But it will happen,” he said./nRead More

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