Relief from U.S. debt ceiling hike may not last long
Bond traders seem to soon stop worrying about the US not raising its external debt limit. At the moment, security owners and traders are more puzzled not by how this increase will affect the financial markets, but by what could happen to the securities sector.
In anticipation of a preliminary deal, the US Treasury will soon replenish its cash balance by selling more than $1 trillion worth of bills before the end of the third quarter, according to the latest estimate. The US cash reserve is currently $39 billion, the lowest since 2017.
Such actions are likely to suck up a significant amount of liquidity from the financial markets. This could increase pressure on the US financial system, which is still showing signs of strain after several banks collapsed and the Federal Reserve raised interest rates and slashed its balance sheet. Accordingly, according to experts, the relief from the increase in the US debt ceiling may be short-lived.
As the US Treasury competes with banks for cash, lenders may face rising short-term funding rates, forcing them to increase the cost of borrowing they impose on businesses and individuals.
American analysts have calculated that this will have the same economic impact as a quarter-point increase in interest rates. And that is likely to happen as traders are already predicting that the Fed could raise its base rate by another 25 basis points by July. In this case, borrowings that have already become incredibly expensive for ordinary Americans will turn into simply unaffordable. For small businesses, this will also be a significant blow.
There is also potential to stimulate further outflows from banks, which have been reluctant to raise deposit rates, to money market funds. The latter, in turn, invest directly in Treasury bills and other short-term, higher-yielding instruments.
The debt limit dispute has rattled the markets as investors demand higher yields on securities due to be redeemed soon. At one of the stages of the last week, the rates on instruments maturing in early June exceeded 7%.
Analysts estimate that as of the start of the first month of summer, the US cash reserve, or Treasury General Account, will rise to $550 billion by the end of June and reach $600 billion in three months. However, the problem for the American economy is that the US dollar, albeit slowly, is losing its position as the world's reserve currency. A number of countries around the world have agreed on mutual trade either in Chinese yuan or in national currencies. Brazil proposes to create a single BRICS currency. And taking into account the trade of the countries included in this group, such a currency will take at least 24% of the volume of the entire world market. Accordingly, for the US dollar, this can be at least an extremely painful blow, the consequences of which new increases in the debt bar may not “heal”.
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