Treasury’s Cash Pile Is a ‘Wild Card’ With New Administration
Liz Capo McCormick and Alexandra Harris
4 min read
(Bloomberg) -- A change in the US Treasury’s leadership is likely to shift how the department treats the cash it parks at the Federal Reserve, with strategists warning of implications that stand to ripple across the nation’s debt market.
Bank of America Corp. and Wrightson ICAP LLC are among firms that say the Treasury could hold less money in its account at the Fed as its cash balance — a buffer of funds to ensure the US can always pay its bills — dwindles. This would allow the government to sell less short-term debt and potentially save the taxpayers money now that the debt ceiling has been reinstated and the cash pile is shrinking. The balance is expected to keep falling until the debt limit is lifted or suspended again.
The breakdown in the composition of the Treasury’s debt load between bills and coupon-bearing securities — which has remained steady for the past several quarters — was a focal point during President Donald Trump’s election campaign, with many prominent voices criticizing former Treasury Secretary Janet Yellen for issuing too many T-bills.
“The new team at Treasury is likely to reconsider the large precautionary cash reserve policies of recent years,” Wrightson ICAP chief economist Lou Crandall said in an interview Friday. “I don’t think the US would be running any serious operational risks if they did bring their cash balance down to past norms, and such an action could also delay Treasury from having to make any adjustment to coupon-bearing debt auction sizes if they did want to scale back their bill issuance.”
Scott Bessent, now awaiting confirmation to head the department, was among those who argued that the decision to rely on short-dated debt to fund the deficit juiced the economy by sending long-term rates lower — a charge the Yellen Treasury rejected.
The possibility of a Bessent-led Treasury signaling the intention to reduce the target for its cash balance could come as early as next month when US debt managers meet for their quarterly debt refunding, according Bank of America strategists Mark Cabana and Katie Craig.
The cash balance in the Treasury General Account held at the Fed stood at $665 billion as of Jan. 22, according to Treasury data published Thursday. That’s down from an April peak at $962 billion and below last year’s average of about $748 billion, the data show.
Back in 2015, Treasury 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, it kept enough cash for just two days. But as budget deficits began to soar, the size of that buffer has grown. US Treasury debt outstanding has skyrocketed to over $28 trillion from about $13 trillion at the end of 2015.
Even adjusting the cash balance by a few billion would allow the department to sell fewer bills, taking some upward pressure off rates. That would also potentially allow the Federal Reserve to continue its balance-sheet runoff for longer, according to both Wrightson and Bank of America.
The central bank has reduced its holdings of government securities by more than $2 trillion since the unwind — a process known as quantitative tightening — began in mid-2022.
Barclays Plc and Bank of America strategists recently pushed back their forecasts for the end of QT to September instead of March, citing subdued volatility in funding markets and a lack of Fed communication on balance-sheet plans.
Further clouding the outlook for both Treasury’s near-term debt issuance and the Fed’s unwind is the reemergence of the debt ceiling, which was reinstated earlier this month.
A more drawn out episode under this constraint will force the government to slash bill supply and spend down its cash pile. In turn, that will artificially boost the central bank’s liabilities, masking money-market signals about liquidity used to measure when it’s time to stop QT.
Moreover, once the debt limit is resolved, the reversal in the Treasury balance and bank reserves could be abrupt, though a smaller government cash pile could minimize the volatile swings in the Fed’s liabilities and money-market rates.
The last time the Treasury addressed the cash balance was in February 2022, when it articulated just how it gauges the size of the buffer.
Officials, as part of the quarterly refunding, noted the Treasury develops its borrowing plans by evaluating cash flow projections for weeks and months ahead, resulting in a cash balance target above the level seen for one-week ahead.
All told, changes to the cash balance policy are likely to be felt outside Washington and force a recalibration for fixed-income investors.
“US Treasury cash balance is a wild card with the administration change,” Bank of America’s Cabana and Craig wrote in a note this week.
While the Treasury Borrowing Advisory Committee can advise on the cash balance, and Congress has oversight, it defers on policy to the Treasury Secretary, and the new secretary could lower the cash pile as a means of reducing costs, they said.
