As of 21 January, the US has begun taking extraordinary measures to avoid breaching the US debt limit (around USD 36trn). Via these measures, the Treasury should have sufficient funds for operational issues until July / August. The standard playbook would be a last-minute lifting / suspension of the debt ceiling. It remains to be seen if Trump can easily avoid this debacle now that he has control of both houses.
From a rates perspective, there are implications on the amount of USD liquidity left in the financial system. We estimate that there are about USD 1.5trn of excess liquidity currently, down from around USD 3.5tn several years ago (before QT kicked off). Now that the debt ceiling has been hit, the government will be drawing down from the TGA, which has around USD 670bn. Assuming that the debt ceiling will only be resolved around mid-year, we would reasonably expect that funds in the TGA will drop close to zero (an April tax bump notwithstanding). This drawdown in TGA funds over the coming six months will more than offset the ongoing QT cap of USD 60bn / month. Accordingly, there will probably be little to no signs of stresses in short-term USD rates for two more quarters as TGA funds masks underlying tightness. Instead, there could be a liquidity shock once the Treasury rebuilds in the TGA in 3Q (when the debt ceiling is lifted). This shock could be avoided if the Fed stops / further slows QT in mid-year, leaving the system with around USD 1trn in excess liquidity as buffer. From a broader perspective, the injection of liquidity into the system in the next few months should support prices, all else equal.
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