Members of the Treasury Market Practices Group (TPMG) were unable to come to a consensus on the impact of the US debt limit being reinstated in their December meeting.
The debt ceiling was suspended in June 2023 as part of the Fiscal Responsibility Act, since which outstanding debt has risen from US$31.4 trillion to US$36.1 trillion.
In December, president-elect Donald Trump called for the ceiling to be abolished before he took office; without success. The cap was reinstated on 2 January, with the limit expected to be reached between 14 and 23 January.
The new ceiling has been established at the amount of outstanding debt subject to the statutory limit at the end of 1 January. At the end of December, Secretary of the Treasury Janet Yellen stated that she did “not expect that it will be necessary to start taking extraordinary measures on 2 January to prevent the US from defaulting on its obligations”.
Speaking to The DESK earlier in November 2024, Dan Veiner, co-head of global trading at BlackRock (US$11.5 trillion AUM), raised concerns that developed countries are racking up unsustainable deficits.
“The increasing issuance of long-duration treasuries is particularly noteworthy. Net debt service spending is projected to surpass US military expenditures and could eventually become the largest spending category. If these trends continue, the liquidity of government bonds, particularly US Treasuries, could be of rising concern,” he said.
Kevin McPartland, head of market structure and technology research at Coalition Greenwich, commented: “It’s a supply and demand concern. If the US government wants to borrow more money than the world is willing to lend, that’s when the market gets concerned.”
Capping Federal debt levels could minimise this risk; but the TPMG’s lack of consensus on its impact may raise eyebrows.
“We’ve been down this road many times before over the last number of years. It is more of a political problem that can become a market problem,” McPartland added.
On the other side of the equation, government bonds are being snapped up by investors. “The real demand for US Treasuries is coming from people who want to buy and hold that debt,” McPartland noted.
Last year the US Treasury market saw record trading volumes, peaking at more than US$1.5 trillion on 31 October.
“The data shows there is no lack of demand to trade those products,” McPartland stated.
However, he acknowledged that minimal changes to the market could have outsized effects due to its systematic importance. “There is an expectation that the US Treasury market remains the most liquid in the world, a safe haven where you can store cash and not have to worry. Any diversion from that status could have a big market-wide impact.”
TPMG also discussed changes to Treasury clearing models in their final meeting of 2024, noting that the Fixed Income Clearing Corporation (FICC) is operating a done-away clearing model initiative, by which a trade is executed by one counterparty and cleared by another. SIFMA is also developing a legal document for the strategy in order to provide standardised legal documentation for the model.
TPMG’s members noted greater complexity using the done-away model for Treasury repo than cash clearing, adding that new infrastructure and workflows need to be introduced for the model to be used successfully.
“The change in Washington will likely slow the roll out of clearing, which I think most people agree is the right thing to do. It’s important, but it should be done in a very slow and measured way. The original deadlines were very aggressive and although the industry made a lot of progress over the last year, there’s a lot more to do – more than could be accomplished safely by the end of the year,” McPartland opined.
“It’s one element of ensuring that the market continues to operate efficiently for the foreseeable future.”
©Markets Media Europe 2024
