U.S. Treasury Details Cash Balance Policy in Wake of Questions

(Bloomberg) -- The U.S. Treasury on Wednesday decided it was time to update the public on how it gauges the size of the cash buffer it needs, in the wake of a series of questions on the matter.

Tucked in a quarterly statement on debt-issuance policy on Wednesday was a three-paragraph explainer on the Treasury's cash-balance policy. The process the department uses “often results in Treasury holding a cash balance above the minimum level necessary to meet its projected one-week ahead cash need,” the statement said.

Last year, the Treasury surprised some observers when it said it would have a notably larger cash balance on hand when a suspension of the federal debt ceiling expired. The department's $450 billion estimate compared with Wall Street strategists' anticipation of roughly $130 billion, based on what had happened in prior debt-limit suspension episodes.

Back in 2020, the Treasury accumulated a record stockpile of cash in 2020 to give itself maximum flexibility to handle emergency spending during the Covid-19 crisis. A seeming lack of clarity on its policy at times, and wild swings in the balance, caused angst in money markets.

“Our cash-balance policy is a risk-management policy, and one that we've gotten several questions about over time,” Brian Smith, the Treasury's deputy assistant secretary for federal finance, told reporters Wednesday.

Questions have come “from a range of sources; from the press, from market participants, from a range of outside sources,” Smith said. “So we thought it would be helpful to outline how some more elements of the policy are implemented and practiced.”

“Treasury seeks to maintain funds sufficient to cover its one-week ahead cash need, which includes both net fiscal outflows and the gross volume of maturing marketable debt,” the Treasury said in its so-called quarterly refunding statement. “The level under the policy represents neither a target nor a maximum balance, but rather the minimum level of cash Treasury intends to maintain in order to ensure it can meet its obligations even if its ability to borrow new funds is temporarily disrupted.”

The department has long sought to hold a cash cushion, but in 2015 instituted the policy of keeping at least five days' worth of expenditures on hand. Before that, Treasury kept enough cash for just two days. As budget deficits began to soar, the size of that buffer grew.