He noted a "surfeit of liquidity and a lack of places to put it - hence the rally in short-rates to almost zero, with the risk of their going negative and the complete lack of bids in recent New York Fed repo operations". In short, the M2 money supply aggregate is growing at an annual 26% rate.Ĭiti's global strategist Matt King reckons the rundown of the Treasury's account will effectively triple the amount of bank reserves created by the Fed's asset purchase scheme each month. The Fed is buying securities worth $120 billion from them each month, aggregate household savings are $1 trillion above pre-COVID levels, and money-market funds are brimming, with assets $700 billion above pre-pandemic levels. Money market imbalances have a habit of spilling over.Įven before the TGA rundown, U.S. money market and short term debt market participants are knee deep in liquidity." "Fewer bills mean more cash looking for a home in liquidity land," JPMorgan said, adding: "U.S. What's more, less Treasury borrowing is seen impacting its main funding avenue of recent years - T-bills and cash management bills, cash-like securities banks use as collateral for repo borrowing and hedging derivative trades.
That may send what Credit Suisse dubbed a "tsunami" of cash into depositary bank reserves. This year, it plans to run down the balance, slashing first-quarter borrowing plans to a quarter of initial estimates. But as stimulus was approved only in December, the accumulated monies were not all spent. The TGA balance soared in 2020 because the Treasury ramped up borrowing to pay for an expected $1 trillion-plus in pandemic relief. In the past four years, it has rarely surpassed $400 billion and prior to 2016, it never exceeded $251 billion. Today's balance is more than four times year ago-levels. That's why the government usually keeps TGA balances low. Last year's reserves drain was masked by the Fed's $3 trillion in asset purchases.īut when cash flows leaves the TGA, bank reserves rise - potentially increasing lending or investment in the wider economy or markets. So a drop in the TGA must see a rise in bank reserves and vice versa. The TGA sits on the Fed's balance sheet as a liability, along with notes, coins and bank reserves.īut the Fed's liabilities must match its assets.
The Fed then debits the Treasury's account and credits the bank's account at the Fed - increasing its reserve balance. When citizens or businesses receives a government cheque, they deposit it at their commercial bank, which presents it to the Fed. government runs most of its day-to-day business through the TGA - managed by the New York Fed and into which flow tax receipts and proceeds from the sale of Treasury debt. Here's what's involved and its potential fallout:
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