ALBAWABA - In a recent report, corporate brokerage and consulting firm Strategas revealed that market liquidity has plummeted by $150 billion since Congress suspended the debt ceiling earlier this month.
The decrease in liquidity is attributed to the Treasury Department's increased debt issuance and the Federal Reserve's efforts to shrink its balance sheet through a quantitative tightening program.
The agreement to suspend the debt ceiling has paved the way for additional Treasury bond auctions, aimed at restoring the government's cash balance. Strategas noted that the Federal Reserve's reverse repo program, designed to counterbalance liquidity loss, has not adequately compensated for the impact of these auctions.
Experts have expressed concerns over potential bank failures resulting from the liquidity drain. They hope that this risk will eventually prompt the Federal Reserve to reconsider its quantitative tightening measures and slow down the process.
The accelerated outflows have been significant, with half of the $150 billion liquidity reduction occurring within the past three days. Investors have largely overlooked this development, as there has not been an immediate negative reaction in the stock market.
Looking ahead, the Treasury Department is expected to engage in substantial borrowing, with Strategas estimating that 50% of the issuances will further reduce liquidity by coming from bank reserves rather than reverse repos.
Analysts at Deutsche Bank anticipate the issuance of approximately $1.3 trillion in Treasury bonds for the remainder of 2023, resulting in a total issuance of around $1.6 trillion for the year. Within the next three months alone, cumulative issuances could exceed $800 billion, according to Deutsche Bank's projections.
The liquidity decline and its potential implications are closely monitored by market participants and will continue to shape the financial landscape in the coming months.
