The central bank began buying longer-term Treasuries and agencies in March to keep markets functioning smoothly as the virus’s spread sparked turmoil. Since then, the Treasury has issued more than $2 trillion of bills, supply that isn’t included in Fed purchases. While investors have been able to absorb the barrage of debt with relative ease, signs of funding dysfunction are starting to emerge.

The spread between yields on three-month Treasury bills and overnight index swaps, which measures the health of a key part of the government debt market, is near the widest level since April. Persistent outflows from government money-market funds could reduce investment in T-bills and repurchase agreements, forcing rates even higher. Those funds have shed cash the past four weeks.

Checking Account
The Treasury General Account, as it’s known, operates like the government’s checking account at the Fed. When Treasury increases its cash balance, that’s on the liability side of the Fed’s balance sheet, so as that goes up, it drains reserves from the system (and vice versa).

Fed Doesn’t Want Another Repo Crisis, But Treasury Isn’t Helping

Fluctuations in the account were linked to some of the forces that caused dislocations in the repo market in September and forced the Fed to step in and provide liquidity.

Treasury in 2015 instituted a policy of keeping at least five days’ worth of expenditures, or a minimum of $150 billion, in the account in case unexpected disruptions locked it out of debt markets. Before that, Treasury kept enough cash for just two days. As budget deficits have begun to soar, the size of that buffer has grown.

Steven Zeng, a strategist at Deutsche Bank AG, considers it unlikely that government outlays will prove large enough by month-end to drive the cash balance below about $1 trillion.

Keeping the extra cash on hand will also allow Treasury to capitalize on having tapped the money already at very low rates.

“It’s not that the money won’t be spent, it’s just a matter of the timing,” he said.

--With assistance from Saleha Mohsin.