Debt Limit Doesn’t Just Affect U.S. Money Markets

(Bloomberg) – The liquidity glut in U.S. money markets that is affecting short-term dollar borrowing costs appears to be spreading to the country’s northern border.

In June, foreigners invested about C $ 18.8 billion (US $ 14.9 billion) in Canadian money market instruments, the month with the highest amount of entries on record, according to government data . And that was before the excess money tied to the debt ceiling even reached its full strength.

With the reinstatement of the US debt ceiling fueling the imbalances in the treasury bill market, investors were quick to find a place to park their cash. Much of that money ended up in the Federal Reserve’s repurchase agreement instruments, which now total more than $ 1.1 trillion, but some appear to have found a home in Canada.

The T-bill imbalance, which helped lock money market rates around zero, is due in large part to the rules surrounding the US debt cap, which came back into effect in June. at the beginning of this month. The Treasury had to reduce its cash balance to comply with the legislation, resulting in reductions in bond issuance even before the cap was reinstated, and attempts to stay within official borrowing limits are likely after the new entry into force to continue to generate distortions until Congress. comes to a new agreement on the limit.

Add to that the Fed’s ongoing $ 120 billion per month asset purchase program and the flow of pandemic stimuli, you can see a lot of cash flowing.

In addition to a general shortage of bond supply, investors fear that the issuance of the debt limit could lead to a technical default on some securities, which contributes to restrict demand for particular issues. It is not yet clear when the Treasury could exhaust the so-called extraordinary measures it is currently using to stay clear of the official default, but fears that it could be in late October or early November are starting to impact stocks. nearby maturing bonds. of these dates.

All of this, and the prospect of getting a little more yield elsewhere, only adds to the incentives for investors to look beyond Treasuries and move into other markets, including Canada.

Original Note: The debt ceiling is not just a problem for the money markets in the United States

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