Get 40% Off
🚨 Volatile Markets? Find Hidden Gems for Serious Outperformance
Find Stocks Now

Ripple effects of raising the US debt ceiling

Published 29/05/2023, 10:51 am
© Reuters
Investing.com - As worries regarding the US debt limit begin to subside, market participants are now shifting their focus to potential implications for money markets. With a tentative agreement in sight, it is expected that Treasury will replenish its cash reserves by issuing over $1 trillion worth of bills through Q3. This would raise the US cash stockpile from its current low level of $39 billion – unseen since 2017.
 
This massive influx could drain a significant amount of liquidity from financial markets and put additional stress on an already strained system following several bank collapses amidst interest rate hikes and balance sheet reductions by the Federal Reserve.
 
The competition between Treasury and banks for available cash may increase lenders' short-term funding rates. Consequently, this could force them to increase borrowing costs imposed on businesses and households. Analysts at Bank of America Corp (NYSE:BAC) suggest that such an outcome could have an economic impact equivalent to a quarter-point interest rate hike.
 
With traders anticipating another 25 basis-point rate increase by July, these factors create uncertainty surrounding yields on short-term Treasuries. Although initial relief from reaching an agreement might cause yields to drop initially, investors' efforts to evaluate subsequent developments are likely to establish boundaries preventing further decline.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.