New Debt Ceiling Deal Signed by President Biden and the Impact on America’s Economy: Warning from Wall Street on Possible Collapse of New Banks as Deposits Flee

America’s economy

With the debt ceiling deal signed by President Joe Biden on Saturday, the US Treasury is about to launch a wave of new bonds to quickly refill its coffers.

This step comes at a time when Wall Street is warning that the markets are not yet ready for it, and this will be another drain on dwindling liquidity.

The negative impact could easily dwarf the aftereffects of past confrontations over the debt ceiling. The Fed’s program of quantitative tightening has already eroded banks’ reserves, while money managers have been hoarding cash in anticipation of a recession.

Nikolaos Panegirtzoglou, strategist at JPMorgan Chase & Co., estimated that the influx of Treasuries would double the effect of QT on stocks and bonds, reducing their combined performance by about 5% this year. Citigroup strategists offer a similar differential calculation, showing an average decline of 5.4% in the S&P 500 over two months could follow a liquidity decline of this magnitude, and 37 basis points for high-yield credit spreads.

The sales, due to begin Monday, will kick off in every asset class amid a claim that the money supply is already shrinking: JPMorgan estimates a broad measure of liquidity will be down $1.1tn from about $25tn at the start of 2023.

Huge drain on liquidity

“This is a huge drain on liquidity,” Banigirtzoglou said. We’ve rarely seen anything like this. “It only happened in serious crashes like the Lehman crisis.”

This event would mark a trend of rare that, together with Fed tightening, would push the liquidity gauge down at an annual rate of 6%, in contrast to annual growth for most of the past decade, according to JPMorgan estimates.

The United States has been counting on extraordinary measures to help finance itself in recent months as leaders have bickered in Washington. The measure brokered between Biden and House Speaker Kevin McCarthy limits federal spending for two years and suspends the debt ceiling until the 2024 election.

With default narrowly avoided, the Treasury will begin a borrowing spree that by some Wall Street estimates could reach $1 trillion by the end of the third quarter, starting with several Treasury bill auctions on Monday totaling more than $170 billion.

It is not easy to predict what happens when billions make their way through the financial system. As there are many buyers of short-term treasury bills such as: banks, money market funds and a wide range of non-financial buyers, and this category includes households, pension funds and corporate treasuries.

Banks may not have an appetite for treasury bills at the moment; It is because the returns offered are unlikely to be able to compete with what they can get from their own reserves.

Mess happens

But even if banks quit treasury auctions, the shift from deposits to treasury bills by their customers could spell havoc.

In turn, the head of global macro strategy at Citigroup, Dirk Wheeler, said: “Any decline in bank reserves portends a disaster.”

And he believes that the most moderate scenario is that the offers from the purchases of mutual cash funds or what is known as “money-market mutual funds” cover this gap, as it is assumed that their purchases, from their cash receptacles, will leave the banks’ reserves as they are. But, historically, the more prominent buyers of Treasury bonds have recently backed out in favor of the better yields offered by the Fed’s reverse repo facility.

That leaves all: non-banks – shoppers of the weekly Treasury auctions, but not without an added cost to banks. These buyers are expected to free up money for their purchases by liquidating bank deposits, exacerbating the capital flight that led to the collapse of regional lenders and destabilizing the financial system this year, according to Bloomberg, which was viewed by Al Arabiya.net.

The government’s increasing reliance on so-called indirect bidders has been evident for some time, according to Althea Spinozzi, fixed income analyst at Saxo Bank. “In the past few weeks, we have seen a record level of indirect bidders during US Treasury auctions,” she said. “It is likely that they will absorb a large part of the upcoming releases as well.”

aftershock

For the time being, the US’s complacency about avoiding default has deflected attention from any impending liquidity aftershock. Meanwhile, investor excitement over the prospects for artificial intelligence has put the S&P 500 on the cusp of a bull market after 3 weeks of gains. Meanwhile, liquidity for individual stocks has been improving, bucking the broader trend.

But this has not allayed concerns about what usually happens when there is a significant drop in bank reserves: stocks fall and credit spreads widen, with riskier assets bearing the brunt of losses.

“This is not the time for the S&P 500,” said Wheeler of Citigroup.

“We think there will be a crushing drop in stocks due to the depletion of liquidity,” said Ulrich Urban, head of multi-asset strategy at Berenberg. “We have bad internal indicators in the market, negative leading indicators and a decline in liquidity, all of which do not support the stock markets.”

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