A $1tn US government borrowing spree could be on the cards as Washington seeks to rebuild its cash balances in the wake of the debt ceiling deal which could place further strain on the country’s banking system.
The Financial Times said JPMorgan has estimated that Washington will need to borrow $1.1tn in short-dated Treasury bills by the end of 2023, with $850bn in net bill issuance over the next four months.
But analysts are concerned that the sheer volume would push up yields on government debt, sucking cash out of bank deposits.
“Everyone knows the flood is coming,” said Gennadiy Goldberg, a strategist at TD Securities, quoted by the Financial Times (FT). “Yields will move higher because of this flood. Treasury bills will cheapen further. And that will put pressure on banks.”
Goldberg said he was expecting the biggest increase in Treasury bill issuance in history, apart from during crises such as the 2008 financial meltdown and the pandemic in 2020.
That shift increases pressure on US bank deposits, which have already fallen this year as the rise in interest rates and the failure of regional lenders have sent customers seeking higher-yielding alternatives.
Further deposit flight and the rise in yields could in turn push banks to offer higher interest rates on savings accounts, which could be particularly costly for smaller lenders.
“The rise in yields could force banks to raise their deposit rates,” said Doug Spratley, head of the cash management team at T Rowe Price, quoted by the FT.