By Michael S. Derby
NEW YORK, Sept 22 (Reuters) – The idea of the US Treasury periodically investing some of its cash into private money markets got a favorable hearing at a panel of market participants held by the Federal Reserve Bank of New York on Tuesday.
“At a high level, the Treasury reinvesting into repo makes sense,” said Richard Chambers, a partner at Goldman Sachs’ banking and markets group, in comments made while speaking on a panel held as part of the regional central bank’s annual Treasury market conference.
“It makes sense from a debt sustainability perspective” to have the “largest” debt issuer in the world help stabilize a money market sector that helps investors and traders get involved with government bonds, he said.
“Having new cash enter the market does add ballast” to money markets, said Frank Gutierrez, head of portfolio management and trading at BNY Investments Dreyfus.
Private repo markets are critical for fixed-income bond trading, vast in size and involve participants borrowing and lending cash and Treasuries to facilitate their trading positions.
The New York Fed panel was exploring the possibility, first broached in May, that the Treasury may periodically invest some unknown amount of cash that now resides in its so-called Treasury General Account in the private repo market, as opposed to being parked at the Fed, as it is now.
If the TGA were invested in the repo market, it would earn a return where it does not when it’s placed at the Fed. It could also help bolster repo market liquidity. It would also incur risk from being in private markets.
The current size of the TGA stands at just under $1 trillion, and it can be seen as an equivalent of a checkbook for the US Treasury.
Cash parked at the TGA is volatile and can move sharply depending on things like tax payment dates and Treasury debt auction settlements. When cash moves out of the TGA it turns into banking sector reserves, and it has implications for how the Fed manages market liquidity and its still large balance sheet.
Participants in the New York Fed panel said that while they welcomed the prospect of government cash entering the market, they would appreciate some sort of process to make it predictable and understandable, rather than some random force that impacts market liquidity at unpredictable intervals.
This possible policy shift “could be an important stabilizer to the market even if it’s not being used every single day,” said Jill Funk, a managing director at J.P. Morgan.
Panel participants said if the Treasury were to make the shift in how it uses TGA cash, it would be helpful to conduct operations early in the day, when repo market participants do most of their key trading. The Treasury could also potentially offer a threshold on the TGA where cash would be invested into repo, for example.
The TGA has also come under greater attention as the Treasury Department has upsized debt buyback operations in an attempt to counter rising borrowing costs. That effort has largely foundered, and some have speculated whether the Treasury might use TGA cash to augment its buyback efforts, though that could raise questions about the government paying for its activities by diverting cash from operational needs.
(Reporting by Michael S. Derby; Editing by Andrea Ricci )
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