The U.S. Treasury is exploring the option of regularly investing part of the cash in its General Account into the private repurchase market, rather than keeping it all at the Federal Reserve. This idea was first proposed in May and entered discussions at the execution level during the 12th U.S. Treasury Market Conference at the New York Fed this week, with several market participants expressing support.

The current size of the TGA is slightly below $1 trillion, equivalent to the Treasury's checking account, with balances fluctuating significantly due to tax periods and Treasury bond settlements. Cash currently parked at the Federal Reserve earns no interest; if moved to repos, the Treasury could earn returns while injecting cash into the private money market, but it would also bear counterparty and market risks.

The panel was chaired by Hunter McMaster, Assistant Secretary for Financial Markets at the Treasury. Richard Chambers from Goldman Sachs stated, "From a high-level perspective, it makes sense for the Treasury to reinvest funds into repos." Jill Funk from JPMorgan believes that even if not used daily, it could serve as a market stabilizer. Frank Gutierrez from Dreyfus, a subsidiary of BNY Mellon, noted that the additional cash could act as a pressure chamber for the money market. Participants requested that operations be predictable, ideally occurring during the most active repo trading in the morning, and that a threshold for excess TGA be established for deployment.

The July Treasury Borrowing Advisory Committee has estimated that in an ample reserves environment, the net overnight repo return on excess cash may be only 0 to 2 basis points, around 5 to 10 basis points when reserves are scarce, and potentially zero when reserves are excessive. Since the Federal Reserve's deferred assets are expected to pay interest to the Treasury only around 2030, if the Treasury receives interest from repos first, the net present value on the books may still be positive, and the committee has requested that assessments be made solely based on economic value. The debt ceiling could interfere with any design.

During the same meeting, Roberto Perli, head of the New York Fed's trading desk, explained that the management of reserves for purchasing bonds has been paused for two periods due to the Treasury's downward revision of its year-end TGA guidance, leading to an upward revision of reserve supply forecasts, while money market rates remain close to the reserve rate. John Williams discussed the transition from bilateral to tri-party clearing, with open market operations following the migration of trading locations. The deadline for mandatory clearing of Treasury cash trades is December 31, and for repos, it is June 30, 2027.

The buyers are dealers and money market funds that need stable morning financing, while the sellers are the Treasury, treating fiscal cash as a policy tool. The flow of funds from the Federal Reserve's liabilities to private repos represents an event-driven liquidity diversion. The beneficiaries are the repo counterparties lacking cash and the interest-earning Treasury, while the pressured party is the banking system, which is accustomed to treating TGA fluctuations as a reserve withdrawal valve; if operations are unpredictable, tax period withdrawals could become a two-way disturbance.

The Treasury has not yet disclosed the scale, frequency, or counterparties for the deployment. The market is watching whether the rules will be written into a calendar rather than being a one-time trial.

Source: Public Information