Daily Comment (July 30, 2021)

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT] | PDF

Good morning, all! U.S. equities appear to be headed for a lower open this morning. Equities have fallen due to concerns over the tech sector as investors fear disappointing earnings reports and a continued tech crackdown by China. Our report begins with a discussion on the debt ceiling followed by international news, where Russia fines a U.S. tech company and Peru has a new prime minister. U.S. economics and policy news are up next, including details about the infrastructure bill and a possible replacement for LIBOR. China news follows, and we end with our pandemic coverage.

Debt ceiling: On Saturday, the agreement that allowed for the temporary suspension of the debt ceiling will be lifted and the new ceiling will be set at the debt level as of tomorrow. The reimposition of the debt limit means that the Treasury will be limited in its capacity to issue new debt. As part of the suspension agreement, the Treasury is required to reduce its cash balance to $450 billion; it is currently around $700 billion. This element of the agreement was designed to prevent the administration from piling up cash in advance of the deadline, which would have reduced the leverage that comes from the debt ceiling. To reach that level, the Treasury has been curtailing the size of its T-bill auctions. We are already seeing the effects of the deadline as short-term interest rates have continued to drop and the Fed’s reverse repo facility has been unusually active.

This chart shows the borrowing made in the Fed’s reverse repo window. Borrowing is currently at $1.0 trillion. Institutions are lending at this facility due to the lack of opportunities elsewhere. Current rates on short-term instruments are running around 5 bps; the interest paid on reserve balances, which is the rate at which the Fed conducts its reverse repo facility, is 15 bps. Although the returns are minuscule, the 10-bp margin is attractive to other alternatives.

As noted above, to reach the $450 billion level, the Treasury has been issuing fewer T-bills than what is expiring, which means available collateral has declined. Although short-term interest rates are falling, paradoxically, it may lead to even less lending. T-bills are used as collateral for shadow bank activities and the lack of supply means less collateral is available for lending. The financial plumbing of the short-term interest rate markets is complicated and the likelihood of a financial accident under these conditions is elevated.

International news: 

  • Google (GOOGL, $2,715.55) was fined by the Russian government for not keeping personal data belonging to Russian users on servers in Russia. Google will have to pay $41,000 to the Russian government and could face additional penalties going forward.
  • Newly elected Peruvian President Pedro Castillo named a far-left party member as his prime minister. Guido Bellido, who is also recently elected, has never held public office and has shown support for communist governments. Castillo’s decision to pick Bellido reinforces concerns that he may implement more leftist policies to the dismay of international investors.
  • Tunisia is in turmoil following the president’s decision to suspend parliament and seize executive power earlier this week. Tunisian President Kais Saied’s power grab has sparked concern that democracy in the country is in jeopardy. The president’s takeover comes after weeks of anti-government protests due to a weak economy and a surge of coronavirus infections.
  • Natural gas prices in Europe are expected to increase as a slowdown in European production and Russia’s refusal to send additional supply have led to shortages throughout the continent.

Economics and policy:


COVID-19:  The number of reported cases is 196,741,728 with 4,201,788 fatalities.  In the U.S., there are 34,754,668 confirmed cases with 612,129 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The FT has also issued an economic tracker that looks across countries with high-frequency data on various factors.  The CDC reports that 397,464,625 doses of the vaccine have been distributed with 344,071,595 doses injected.  The number receiving at least one dose is 189,945,907, while the number of second doses, which would grant the highest level of immunity, is 163,739,916.  The FT has a page on global vaccine distribution.

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