Short term, this will undoubtedly create a further relief rally for risk markets, given the removal of a significant tail risk. However, we now move from a period where the Treasury has been drawing down their general account (by the order of $360bn in the first five months of this year) to now needing to build its balances back up. To what extent they build this back up is open to debate, but they will want to run a significantly higher margin than has been the case recently and may well want to take it back to the US$ 600 – 650bn that it averaged in early 2022. This will likely be through a significant rise in US T-bill issuance and the debate will be around how quickly they want to restore the previous healthy margins for the general account, especially when there is an ongoing withdrawal of liquidity also from quantitative tightening.
The debt ceiling agreement does lead to a reduction in spending, but estimates point towards this effect being around a 0.1 – 0.2% decrease in GDP over the next 2 years. However, the probability is that the resolution of negotiations has moved the Treasury account from being a significant stimulant to the US economy to a significant drain. Combined with the marginal, though still negative effects of the spending cuts, the US economy, which was surprisingly robust the first half of this year, looks set to soften into the second half.
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