By now everyone is aware that due to the pick up in tax revenues coupled with a cut in spending, US funding needs have been decreasing over the past year at least until the demographic inflection point hits in 2015 and the old trend reverts. That this is happening to the chagrin of the Fed, which is unable to trim its montly monetization of securities, i.e., taper, without crashing the market and is therefore forced to monetize more than the entire 10 Year equivalent net monthly issuance is also known to all except for the Fed it seems, which instead is forced to gobble up increasingly more high quality collateral.
Which is precisely what the moments ago released marketable borrowing estimates [4]by the Treasury for Fiscal Q1 and Q2 revealed: funding needs for the October-December quarter declined from the prior $230 billion estimate to $204 billion, while the Q1 funding needs were set at $356 billion, in line with last year's number. And yet, the Treasury also announced that despite a lower funding need in the current quarter, it would proceed with issuing $32 billion more in net Treasurys, or $266 billion, than previously estimated. Why? To push the quarter end cash balance from $80 billion to $140 billion at December 31, 2013. This is the highest quarter-ending cash balance since 2010.
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Why is the Treasury scrambling to build up cash ahead of calendar 2014? Simple: as is well-known, the debt ceiling drama comes back with a vengeance in late January and early February, and this one promises to be just as theatrical and protracted as all prior ones. Which means that in order to push back the ultimate day of reckoning, the infamous X-Date, beyond which the Treasury truly has no cash, it is now stocking up on as much cash as it can get its hands on.
Based on rough estimates, the additional $60 billion in cash means the Treasury may have just bought itself at least 1 month of additional wiggle room before it runs out of emergency measures. And since the Treasury is indicating it will have that much extra cash going into 2014, it virtually assures that the theatrics surrounding this latest upcoming debt target hike, when Boehner again huffs and puffs before folding in a lawn chair of epic humiliation, will be on par with all prior such soap opera episodes.