The Senate just passed the debt ceiling bill. Here's what happens next

Aug 12, 2023

The faucets at the US Department of the Treasury are set to turn back on after nearly five months of frozen pipes.

In a vote on Thursday evening, the Senate approved a measure to suspend the nation's debt limit through January 1, 2025. President Joe Biden is expected to swiftly sign the bill into law to avert the United States’ first-ever default on its debt.

Since the debt ceiling was breached in mid-January, the Treasury Department has not been able to borrow more money. To pay its bills on time, Treasury has undergone a series of extraordinary measures to buy it more time in hopes that Congress takes action to suspend or raise the debt limit.

These measures included selling existing investments and suspending reinvestments of the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund. Doing so helped the Treasury free up billions of dollars to delay a potential default.

Now, Treasury will try to quickly get back to business as usual. To do that, the Treasury will need to raise cash. Fast.

By law, the Treasury Department is obligated to make any funds that were affected by the extraordinary measures whole. It is also required to pay interest on the lapse in funding.

One way it hopes to grow its cash balance is by auctioning off $15 billion worth of one-day cash management bills on Friday.

These bills mature in a relatively short time frame, ranging from a few days to a year, according to the Treasury Department. They’re used to help manage the Treasury's short-term financing needs.

Unlike Treasury bill auctions that occur on a weekly and monthly basis, cash management bill auctions are irregular, though not uncommon. For instance, last year the Treasury held more than 30 cash management bill auctions.

It is, however, quite unusual for the department to auction debt that matures in just one day. Over the past 25 years, the Treasury has held just six one-day cash management bill auctions.

In addition to Friday's auction, a Thursday auction saw $25 billion of three-day cash management bills yielding 6.15%. That exceeds the yields at which almost all other Treasury bills are trading, underscoring the premium investors are demanding to buy the government's debt.

The Treasury is tentatively issuing an additional $123 billion in longer-term bills on June 8. Ahead of the Senate's vote, the Treasury said it was "conditional on enactment of the debt limit suspension because Treasury forecasts insufficient headroom under the current debt limit to issue securities in these amounts on June 8."

Translation: The Treasury had been hedging its bets so that it is not on the hook to make interest payments on time to bill holders in the event that the debt ceiling deal wasn't signed to law in time to avert default. Now that the Senate has passed the bill and Biden has said he’d sign it, Treasury is set to announce more borrowing initiatives.

It will need them, because the United States has some big bills coming due soon: Treasury makes interest payments around the 15th day and on the last day of the month, and the Congressional Budget Office had said there was significant risk Treasury would exhaust all of its resources by June 15 if a debt ceiling suspension hadn't been passed.

Although Treasury is expected to get an infusion of cash from tax payments due June 15, it will owe interest payments that day, too — mid-month interest payments are usually around $3 billion, CBO said. End-of-month payments have ranged from $10 billion to $16 billion over the past six months.

But the Treasury's immediate cash demands could throw a wrench into the stock market, which for the most part has ignored the risks of default.

That's because the Treasury will likely have to continue to pay high-interest rates on its debt to raise cash. In turn, investors may opt to buy more Treasury bills instead of stocks, potentially sucking some liquidity out of the market.