The US fiscal balance is insufficient, and overseas websites have gone deep at one point: trillions of US bonds are about to enter debt | crisis | US

Data chart: US Treasury Department.

The US economy, which has just escaped the debt ceiling crisis, may face a new crisis. According to the report of the Wall Street Journal on June 7, investors are worried that the possible issuance of more than $1 trillion of treasury bond by the US Treasury will trigger a new round of fluctuations in the financial market.

Crisis triggers market concerns

On June 7th, the US Treasury Department announced that due to debt ceiling issues, its cash balance dropped to its lowest level since 2017 last week. The Treasury hopes to restore its general account to a normal level of approximately $600 billion by September.

This news has raised concerns among market investors as it means that the Ministry of Finance is about to issue a large amount of bonds. The Wall Street Journal quoted JPMorgan Chase's data that the U.S. government is likely to issue $850 billion of treasury bond in the next four months, and by the end of 2023, the U.S. government will need to borrow $1.1 trillion of short-term treasury bond. Goldberg, senior U.S. interest rate strategist of Dominion Securities, said that, except for a major crisis like 2008 or 2020, "this will be the largest issuance of U.S. treasury bond bonds in history".

It is currently unclear how the US Treasury will raise such a huge cash reserve in just four months. Generally speaking, there are various buyers of short-term treasury bond: banks, money market funds, and "non bank" buyers such as households, pension funds and corporate bonds. Bloomberg reported that the interest of banks in treasury bond is limited at present, because the income it can provide is unlikely to compete with the income from their own reserves.

The Wall Street Journal quoted some analysts as saying that money market funds may become the largest financing party for this round of bond issuance. Due to the regional banking crisis earlier this year, many investors shifted their funds from crisis ridden small banks to safer and more stable money market funds, with the size of this fund in the United States exceeding $5 trillion. However, the risk here is that if monetary funds are to be attracted to invest in treasury bond, the yield must be at least 5%, which means that the U.S. government may have to borrow at an interest rate of nearly 6%, compared with 0.1% a year and a half ago.

Sharp increase in financial system pressure

The US Treasury Department has had to issue bonds so quickly and in such a large amount in the short term, which has raised concerns among some institutions and investors. They are concerned that this move will affect the liquidity of the US market, which in turn will have an impact on the stock market and other financial sectors.

The New York Times warned that such a large and rapid borrowing would inevitably transfer cash from banks and other lenders to the US treasury bond bonds, withdraw funds from the financial system, and increase the pressure on already stressed regional lending institutions. JPMorgan analyst Nicholas Panigizoglu believes that if we take into account the quantitative tightening policy currently being implemented by the Federal Reserve, market liquidity indicators are expected to decline at a rate of 6% per year, "which is in stark contrast to liquidity growth for most of the past decade," and "you would only see this contraction in a severe collapse like the Lehman crisis.".

Bloomberg analyzed that the surge in the issuance of treasury bond would quickly deplete the liquidity of the banking industry, raise short-term financing interest rates, and tighten the U.S. economy when it is on the verge of recession. Goldberg said that in order to purchase treasury bond, banks may rush to raise more funds, which will further push up financing costs and put pressure on the financial system. Bank of America estimates that massive borrowing will have the same economic impact as raising interest rates by 25 basis points.

Christopher Campbell, who served as the US Deputy Secretary of the Treasury from 2017 to 2018, stated in an interview with The New York Times that "it's hard to imagine the Treasury selling potentially $1 trillion worth of bonds to the market without affecting borrowing costs," and "the potential impact on the economy could be extraordinary.".

The debt ceiling is deadlocked

The 1 trillion US treasury bond to be put on the market and the negative impact it will bring are the root of the debt ceiling crisis. In January of this year, the US Treasury Department warned Congress that US debt was about to reach its limit, but the two parties engaged in a political game until the "last second", resulting in the current situation of nearly trillions of dollars in debt issuance in four months. Goldberg said, "The fundamental reason is still the entire debt ceiling deadlock.".

The Congressional Budget Office predicts that the federal budget deficit for 2023 alone is expected to be $1.5 trillion, and will nearly double to $2.7 trillion by 2033. It is estimated that the budget deficit of the United States in the next 10 years will reach $20.2 trillion. When the US Government Accountability Office released its annual National Financial Health Report in May this year, it clearly stated that the US federal government is facing unsustainable fiscal prospects. If policies are not adjusted, the debt scale will continue to accumulate at a rate that exceeds economic growth. This also means that the debt ceiling issue will continue to plague the United States.

Public opinion generally believes that the debt ceiling crisis in the United States has repeatedly occurred, mainly due to three reasons. One is that over the years, the US fiscal balance has been imbalanced, and the continuous accumulation of fiscal deficits has led to a rapid increase in debt; Secondly, after the subprime mortgage crisis, relying on the hegemony of the US dollar, the Federal Reserve implemented a long-term ultra loose monetary policy to promote an increase in debt; The third is the intensification of party struggles around the debt ceiling, which has led to the continuous politicization of the debt issue. Mark Godwin, Senior Policy Director of the Federal Budget Accountability Committee, an independent research institution in the United States, said that if the United States could save $8 trillion over the next 10 years, it would be a good state, but the 2023 Fiscal Accountability Act could only achieve 1/8 to 1/4 of its goals. "This is obviously not enough to get us all the way there, and it can even be said that it's far from enough."