Wall Street strategists looking ahead to Dec. 31 - when the current suspension of the US debt ceiling ends - gained some clarity from the Justice Department, leading market participants to expect a smaller reduction in Treasury bill supply.

The Treasury has to shrink its pile of cash as it approaches the suspension deadline, as mandated by legislation. Until 2021, this had meant reducing the balance, known as the Treasury General Account or TGA, to the lowest point that was hit during the previous confrontation. Those occasions resulted in a significant reduction of Treasury bill supply before the US came close to exhausting its borrowing capacity.

The Justice Department last week however re-released a memo published in 2021 that argues the language used in past debt-limit suspension bills gives the Treasury some room to manage its cash balance according to prudential practices, though it doesn’t allow the government to boost its buffer heading into the reinstatement.

Market participants now anticipate there won’t be a paydown in Treasury bills to the TGA levels seen ahead of the previous default deadline on June 5, 2023, when the balance hit $23 billion. Blake Gwinn, head of US interest rates strategy at RBC Capital Markets, said the bank had included a sharp paydown in its previous T-bill forecasts but “after this memo, we will probably be taking that out.”

The memo resolves “some (but not all) of the ambiguity” around the year-end level of the TGA, Wrightson ICAP economist Lou Crandall wrote in a Monday note to clients. “The market had been uncertain what cash-balance rules would apply when the current debt ceiling suspension expired on Dec. 31.”

The Treasury doesn’t need to decide how much cash it wants to hold until the August refunding announcement, he said, estimating the year-end cash buffer will be in the $500 billion to $600 billion range. It stood at about $668 billion on April 11, according to the latest data.

Once the debt ceiling is reinstated on Jan. 1, 2025, the Treasury can take a series of extraordinary measures to avoid exceeding the spending cap as quickly as it might otherwise do. These include slashing the amount of T-bills it issues, spending cash parked at the Federal Reserve and suspending payments to government trusts.

During last year’s debt ceiling standoff, the Treasury was able to stretch cash balances and extraordinary measures until the first week of June after the US deficit hit the statutory limit of $31.4 trillion in January 2023.

Wrightson anticipates there will be about $300 billion in extraordinary measures when the debt ceiling comes back into effect. Contributions from a larger cash balance and accounting flexibility could give the Treasury sufficient funds to meet its payment obligations until April 2025, when tax receipts are due.

  - Bloomberg