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.