Washington is again studying whether to place some of its cash reserves into the $13 trillion repurchase-agreement market, an approach tried before the 2008 crisis that has returned and fueled debate about how it might affect a key piece of market infrastructure. The concept got a trial run in the years ahead of the 2008 financial crisis and has come back because Treasury cash flows have become less predictable, complicating the Fed's balance-sheet reduction. If the government placed part of its about $1 trillion cash pile into repo, it would act as a lender in the same market where the Fed runs its liquidity operations.
About $966 billion is in the Treasury General Account. The government's balance at the Fed has grown with rising government deficits; Treasury debt outstanding went from $13 trillion at end-2015 to $31 trillion. The Treasury frequently holds larger cash balances than necessary, which is why it is exploring repo investment.
One reason the Treasury's cash pile matters is that money in the Treasury General Account is removed from the banking system. When the Treasury runs down its balance, reserves are added; when it builds the balance, reserves are drained. With the Fed no longer supplying abundant reserves, those swings can move short-term rates.
Large swings around tax dates and debt settlements have therefore become a focus for market participants.
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Because the Fed has been reducing its bond holdings, Treasury cash movements can push on the level of bank reserves. Dealers and investors now pay close attention to the timing of tax payments and debt settlements, since those are when the Treasury's cash balance tends to move sharply.
In September 2007, the Government Accountability Office recommended making the program permanent, saying it would boost earnings, broaden investment options, and lower concentration risk. But the financial crisis soon led the Fed to inject trillions, pushing short-term rates to historic lows. Those rock-bottom rates made it unattractive for Treasury to park cash with banks, so it moved the bulk of its balance to a non-interest-paying Fed account to protect taxpayers.
Late last year, the Fed stopped shrinking its $6.7 trillion portfolio after borrowing costs jumped and liquidity vanished while Treasury issuance ramped up.
"It's a way for Treasury to make the footprint of normal swings in their cash balance less pronounced on front-end markets," Gennadiy Goldberg, who heads interest-rate strategy at TD Securities, said. "The benefits of this program are most likely to accrue to the Fed, who can theoretically operate with a slightly smaller balance sheet."
This month, Treasury's regular survey of primary dealers asked about repo; its request to the Treasury Borrowing Advisory Committee the prior quarter had already produced a "healthy debate" in May. TBAC members told Secretary Scott Bessent that logistical complications would exceed any small financial benefit. According to the committee, returns depend on bank reserves: with reserves abundant, Treasury would get zero to 2 basis points; a smaller Fed balance sheet could shrink reserves and raise funding costs, producing potential returns of 5 to 10 basis points.
"It's a lot of work for very little money," said Jay Barry, who runs the rates strategy team at JPMorgan Chase & Co. He added that the active discussion increases the chance Treasury eventually rolls out a program. Michael Cloherty's CIBC strategy team argues the plan is improbable unless Washington can guarantee it won't strain dealer balance sheets; dealers lack spare capacity to reserve space for occasionally massive Treasury repos. Officials at the Treasury did not promptly reply to a request for comment.
Some market participants think Treasury's repo presence would be like adding another systemically important bank, comparable in size to JPMorgan Chase & Co. or Citigroup Inc. A bigger pool of cash could dampen swings in funding markets, particularly at coupon-auction settlement, tax deadlines, and month-end or quarter-end reporting dates. "It's almost like having another G-SIB that's a potential cash lender in the market because they're ready, willing and able to lend if conditions are right," Mark Cabana, who leads rates strategy at Bank of America, said. "It's hardly a new Fed-Treasury accord, but it could help both if done correctly," TD's Goldberg said.
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