Treasury Dips Into Its Cash Reserves, Awaiting New Action on Debt Ceiling
Mon May 6, 9:28 PM ET
By: Rebecca Christie
Dow Jones Newswires
WASHINGTON -- The Treasury Department (news - web sites) is using some cash reserves well before it hits its statutory borrowing limit and may be rapidly exhausting its arsenal of emergency measures as it waits for Congress to act.
But some people on Capitol Hill believe the department isn't in any danger of exhausting reserves before the debt limit is extended.
The Treasury has said that if the debt ceiling isn't raised by June 28 , the government risks defaulting on payments to the Social Security (news - web sites) trust fund.
Daily statements suggest the Treasury began dipping into its accounts with large banks, or "compensating balances," as far back as mid-March and may have tapped the accounts for as much as $10 billion on Friday.
It's uncertain how much is in the funds now. But they are believed to hold $20 billion or more when full. When last reported at the end of September, they had $13.4 billion.
Lou Crandall, chief economist of Wrightson Associates and a veteran watcher of Treasury cash management, estimates the Treasury may have taken out $15 billion to $20 billion that will have to be replenished. Still, the balances amount to " a pretty significant slush fund," Mr. Crandall says.
The compensating-balance accounts are Treasury funds that can be tapped legally, and banks generally are flexible with the Treasury's doing so. The accounts earn interest for banks, which hold the money in lieu of charging fees. It's a common way of paying for financial services, also used by private businesses.
Drawing them down is fairly routine, occurring several times a year.
Usually the Treasury takes out only $1 billion or $2 billion and quickly replaces it, adding sufficient money to make up interest that wasn't earned when it was using the funds elsewhere.
In November 1995 , however, the Treasury removed $2.3 billion from the funds -- likely the majority of its balance at that time -- and didn't replace it until spring, when Congress finally approved a permanent increase in the debt cap.
Not everyone has accepted the Treasury's view of the urgency of acting. Congressional leaders have tacked a debt-limit rise onto a supplemental appropriations bill that is expected to take at least a month to pass.
"The Treasury has a strong incentive to leave the impression that they will run out of flexibility on the earlier side of what is possible," said Goldman Sachs economist John Youngdahl. "From what people in congressional circles have told me, they think the Treasury has a lot of tools at its disposal, beyond those that have been used thus far, that would extend the genuine deadline for action on the debt ceiling."
But the Treasury's daily cash statements remain unusually weak, and it has begun raising new cash during a season that is normally associated with bill paydowns. In Tuesday's four-week bill auction, the Treasury will sell $20 billion to raise $6 billion in new cash, well above expectations.
Meanwhile, in Treasurys trading Monday, prices eased ahead of a planned Treasury sale of $22 billion of five-year notes Tuesday, the largest ever in the maturity. The Treasury plans to sell $11 billion of 10-year notes Wednesday.
At 4 p.m. , the benchmark 10-year note was down 3/32 point, or 93.75 cents per $1,000 face value, at 98 16/32. Its yield rose to 5.073% from 5.058% Friday, as yields move inversely to prices. The 30-year bond's price was down 4/32 point at 97 18/32 to yield 5.545%, up from 5.536% Friday.
Corporate Bonds
Brokerage firms' bonds weakened as Moody's Investors Service said any criminal indictments of investment banks could lead to ratings downgrades.
Yield margins to Treasurys in the brokerage sector generally widened about 0.05 percentage point.
Merrill Lynch & Co .'s 6% issue due 2009 was quoted 1.00 percentage point above Treasurys.
Moody's spoke specifically of Merrill, which is being investigated by the Securities and Exchange Commission (news - web sites) and the New York state attorney general. Moody's said any criminal indictment of Merrill would prompt a one-notch downgrade of the firm's long-term debt rating.
Merrill now has a double-A3 rating from Moody's.
Moody's said it expects investigations of the brokerage sector to "be lengthy, with several stages."
It said, "If the course of the investigations turns very negative for a particular firm, then multiple notch downgrades are possible. Moody's analysis will focus on the damage of criminal indictments to the firm's reputation, its long-term franchise with investors and its financial performance."
Credit ratings affect the cost of funding for banks and brokerages. And if an institution's ratings decline, it must post additional collateral to support trading operations.
Ironically, the bank and brokerage sector had been something of a haven for investors in the corporate-bond market, but the sector has faced mounting pressures.
"You can't hide in any sector," said David Hendler, credit analyst at independent research firm CreditSights. Mr. Hendler believes the industry is likely to trend toward single-A, though some brokers' ratings could be supported by mergers (news - web sites) with commercial banks.
Municipal Bonds
Despite expensive levels generally for New York -related municipal bonds and its huge size, this week's Metropolitan Transportation Authority (news - external web site) $2.87 billion offering will find ample buyers, people in the market said.
Bear Stearns is senior managing underwriter for what is the third-largest single munibond deal ever. The only larger single-issue deals were $4 billion by California in 1994 and $3.45 billion by the Long Island Power Authority in 1998.
The MTA issue was to be available for retail orders Monday and Tuesday, with an institutional sale Wednesday. Some of the securities, which range from two to 30 years in maturity, may be insured, said MTA Finance Director Kim Paparello, but only "if it's very compelling" economically.
Treasury Will Raise $6 Billion in Cash From Sale
Separately, the Treasury Department plans to raise $6 billion in new cash with the sale Tuesday of about $20 billion in four-week bills to redeem $14 billion in maturing bills.
The sale amount is up from the past week's auction, when the Treasury Department sold $16 billion in four-week bills.
The four-week bills will mature on June 6 . The Cusip number is 912795JX0.
Noncompetitive tenders for the bills, available in minimum $1,000 denominations, must be received by 11 a.m. EDT Tuesday. Competitive tenders for the bills must be received by 11:30 a.m. EDT .
-- Richard A. Bravo and Tyler Lifton contributed to this article.
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