For Banks, Debt-Ceiling Drama Doesn’t End With a Deal
A wall of money to replenish the government’s cash hole could cause instability if it makes banks’ deposit issues worse
By Telis Demos, The Wall Street Journal, May 24, 2023
Even once the debt ceiling is resolved, there may be more plot twists for American companies—especially deposit-hungry banks…
Since the Treasury must refill a huge hole that the multimonth drama has forced it to dig [the unconventional means used by Treasury to prevent default even though expenses were higher than inflow – W], the refunding process could add to the competition for the cash of savers and investors. That would exacerbate worries about banks’ funding… [end quote]
The Fed is also continuing its Quantitative Tightening program (QT), the very gradual rolloff of longer-term Treasury and mortgage debt. This will cause higher interest rates at longer durations.
Banks which bought long-term debt (including Treasuries) in 2020-2021 to stretch for yield while the Fed practiced ZIRP will be hurt.
The next few months may present an opportunity for investors to lock in unusually high yields.
Wendy