(Bloomberg) — A change in leadership at the U.S. Treasury Department is likely to transform how the administration handles cash in the parks at the Federal Reserve, with strategists warning of the implications for the nation’s debt market.
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Bank of America Corp. And Wrightson ICAP LLC are among the companies that say the Treasury could hold less money in its account at the Fed as its cash balance — a buffer of funding to ensure the U.S. always keeps its bills — dwindles. This would allow the government to sell less debt in the short term and potentially save taxpayers money now that the debt ceiling has been restored and the cash pile has shrunk. The balance is expected to continue to decline until the debt limit is raised or suspended again.
The collapse in the composition of the Treasury debt load among bills and coupon-bearing securities—which has remained flat over the past several months—was a focal point during President Donald Trump’s election campaign, with several prominent voices criticizing former Treasury Secretary Gannett for issuing too many T-bills.
“The new team at the Treasury Department will likely reconsider the precautionary monetary reserve policies of recent years,” Lou Crandall said in an interview on Friday. “I do not believe the United States would manage any serious operational risks if it brought its cash balance back to previous benchmarks, and this action may also delay the Treasury from having to make any adjustment to coupon-bearing debt auction volumes if they were to expand the scope of bill issuance.”
Scott Pesen, who is now awaiting confirmation to head the administration, was among those who argued that the decision to rely on shorted debt to finance the economy’s deficits by sending lower long-term rates to the Treasury softened.
The possibility of a Bessent-led Treasury signaling an intention to reduce the target for its cash balance could come as early as next month when U.S. debt managers meet for their quarterly debt recovery, according to Bank of America experts Mark Cabana and Katie Craig.
The cash balance in the Treasury’s general account held at the Fed was $665 billion as of Jan. 22, according to Treasury data published Thursday. This is down from April’s peak of $962 billion and below last year’s average of about $748 billion, the data shows.
In 2015, the Treasury Department established a policy of keeping at least five days’ worth of expenses, or at least $150 billion, in the account in case unexpected disruptions emerge from the debt markets. Before that, he only kept enough money for two days. But as the budget deficit began to rise, the size of this buffer grew. Outstanding US Treasury debt has risen to more than $28 trillion from about $13 trillion at the end of 2015.
Even adjusting the cash balance by a few billion would allow management to sell fewer bills, generating some upward pressure rates. This Fed would also likely allow dated sheet runoff to continue for longer, according to both Wrightson and Bank of America.
The central bank has reduced its holdings in government securities by more than $2 trillion since it began relaxing—a process known as quantitative tightening—in mid-2012.
Barclays PLC and Bank of America Strategists recently backed down their end-of-QT forecasts to September instead of March, citing erratic volatility in funding markets and a lack of Fed calls on public note plans.
Further overcoming expectations for near-term Treasury debt issuance and relaxation at the Fed is the return of the debt ceiling, which was reinstated earlier this month.
A more graphic episode under this constraint would force the government to reduce its supply of bills and spend its cash pile. In turn, this will artificially boost central bank liabilities, masking money market signals about liquidity used to gauge when it is time to stop QT.
Moreover, once the debt limit is resolved, a reversal in the Treasury balance and bank reserves can be abrupt, although a smaller government cash pile can reduce volatile fluctuations in the Fed’s liabilities and market rates.
The Treasury last addressed the cash balance in February 2022, when it explained how it assessed the size of the buffer.
As part of the quarterly recovery, officials noted that the Treasury develops borrowing plans by evaluating cash flow projections for weeks and months ahead, resulting in a cash balance higher than the level seen for one week.
Finally, changes in cash balance policy will likely be felt beyond Washington and force a recalibration for fixed-income investors.
“U.S. Treasury balance is a wild card with change of administration,” Cabana Bank and Craig wrote in a note this week.
While the Treasury Borrowing Advisory Committee can advise on monetary balance, and Congress legislates, they said, it oversees policy for the Treasury Secretary, and the new secretary could reduce the money pile as a way to cut costs.
