Investing.com -- Analysts at Strategas said in a note this week that they expect the U.S. Treasury to begin injecting a substantial $700 billion of liquidity into financial markets during the first half of 2025.
The firm said they expect the "liquidity bazooka" to begin on January 1.
"Increasing liquidity at this level provides a massive tailwind for investors to cushion uncertainty over tax increases and/or tariffs in 2025," wrote Strategas.
The firm adds that the trigger for this liquidity surge is the upcoming debt ceiling limit, which will be hit on January 1.
At that point, the U.S. government will no longer be able to issue new debt until Congress raises the ceiling, a process likely to extend into July, explains Strategas. During this period, the Treasury will rely on the $700 billion held in its Treasury General Account (TGA) to cover its expenses.
When that happens, Strategas says, “TGA funds, which are held at the Federal Reserve and outside the banking sector, will be transferred into the banking system, boosting bank reserves.”
This injection "sounds like QE, but from the Treasury,“ comments Strategas, stating there will be a "consistent stream of liquidity being pumped into financial markets.”
Historically, large liquidity injections have been associated with looser financial conditions, such as lower bond yields, a weaker dollar, and outperformance of long-duration assets.
The firm adds that the liquidity surge is expected to provide a crucial tailwind for investors as it cushions market uncertainty.
Strategas points out that the impact of these TGA flows may still be underappreciated by the market consensus. This is only the third time the U.S. has hit the debt ceiling under a new fiscal regime, following similar events in 2021 and 2023.
"Treasury made a big shift in recent years to make TGA a bigger portion of US bank accounts, instead of commercial bank accounts. By moving outside the banking sector, financial markets are impacted by tax payments (liquidity drain) and the government paying its bills while the debt ceiling is hit (liquidity boost)," concludes Strategas.