The US Treasury Department will probably reduce its borrowing on behalf of the Federal Reserve as the Obama administration and Congress battle over raising the US debt limit, according to Wrightson ICAP LLC.
Treasury officials may shrink the Supplementary Financing Program (SFP), currently at $200 billion, to as little as $5 billion while the government’s debt approaches its $14.29 trillion threshold, said Lou Crandall, chief economist at Wrightson, a Jersey City, New Jersey-based research firm that specialises in US government finance. Treasury Secretary Timothy F Geithner said on January 6 law makers must raise the federal borrowing ceiling in the first quarter or risk a default on US debt and a loss of access to credit markets.
When the Treasury sells bills at the Fed’s behest through the SFP, it drains reserves from the banking system and makes the central bank’s job of controlling interest rates easier. The Fed said a year ago that the program, set up in 2008 during the midst of its efforts to prop up the financial system, is helpful to the central bank’s monetary policy goals and might be part of future efforts to withdraw economic stimulus. Treasury estimates the legal limit could be reached between March 31 and May 16.
“Time is running out on the SFP auctions, but there is little risk that the Treasury will terminate them without any advance warning,” Crandall said in a telephone interview. “If the debt ceiling drags on to the point where the Treasury must take more drastic steps to stay under the limit, it might eliminate the SFP altogether.”
Borrowing strategy
The Treasury will provide a borrowing strategy update on February 2, when it announces the amount of securities it will sell under what’s become known as its quarterly refunding. The SFP program is not listed as a topic on the official agenda for the January 28 meeting of the Fed’s 18 primary dealers that takes place before the release of the policy statement.
Colleen Murray, a Treasury spokeswoman in Washington, declined to comment on plans for the SFP. In a January 21 comment on the Treasury’s website, Deputy Secretary Neal Wolin called on Congress to raise the limit and said proposals to “prioritise” debt payments over other obligations would be “unworkable.”
Focus on the debt ceiling, which was increased a year ago, has risen since Republicans won control of the House of Representatives in November with pledges to challenge the Obama administration on spending. GOP lawmakers have told President Barack Obama and Democratic legislators that they will insist on specific cuts as a condition of raising the US debt limit.
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Emergency measures
The US can’t avoid reaching the debt limit by reducing the budget as being proposed by some lawmakers, Geithner said. “The need to increase the debt limit would be delayed by no more than two weeks,” Geithner said in his January 6 letter to Speaker of the House John Boehner, Senate Majority Leader Harry Reid and all other members of Congress.
The Treasury chief also said his department’s toolkit of emergency measures, such as tapping government retirement funds and suspending some types of intergovernmental lending, would delay a debt ceiling breach “by several weeks.” At that point, he said, “no remaining legal and prudent measures” would be available and the US would start to default.
Treasury would likely shrink the SFP before the limit is reached, according to Barclays Plc and Deutsche Bank AG. The Treasury has shrunk the SFP in two previous debt-limit standoffs and then brought it back when Congress restored borrowing room.
General collateral
Removing most of the SFP programme’s $200 billion in bills from the market would trigger three-month rates to fall by over 0.10 percentage points, according to Deutsche Bank. Overnight repurchase agreement rates, which firms use to finance debt holdings, may slide more, according to Barclays, which along with Deutsche Bank is one of the primary dealers that trade with the Fed.
The overnight general collateral repurchase agreement rate was 0.23 per cent, compared with the Fed’s target rate for overnight loans of zero to 0.25 per cent. Government securities that can be borrowed in the repo market at rates close to the Fed’s target are called general collateral.
Ending the SFP program could cause the rate on the three- month Treasury bill to slide to as low as 0.01 per cent from 0.15 per cent, Marcus Huie, fixed-income strategist at Deutsche Bank in New York, said in a telephone interview.