The U.S. Treasury Department releases key forecasts, significantly reducing the risk of a "U.S. debt issuance wave."

With the passage of the "Big Beautiful Act" raising the debt ceiling, the U.S. Treasury plans to rebuild its cash reserve program, but it will not trigger a "supply shock." On Tuesday, the U.S. Treasury announced that it plans to increase the cash reserves of the Treasury General Account (TGA) from approximately $313 billion on July 3 to $500 billion by the end of July, with an expectation to reach a level consistent with cash balance policy of about $850 billion by September. According to the Treasury's statement, this goal is consistent with previous forecasts, but the pace of rebuilding is more gradual. The Treasury made it clear that it will fund this through increasing the size of weekly benchmark Treasury auctions rather than issuing cash management bills. Analysts pointed out that this moderate rebuilding approach reduces market concerns about a large influx of new debt supply. Wall Street Journal previously mentioned that according to CICC analysis, since the beginning of the year, the U.S. has reached its debt ceiling, and before resolving it, the Treasury could only meet necessary payment demands by depleting its existing cash reserves. The TGA has been reduced from $840 billion at the beginning of the year to $300 billion, and the Treasury previously expected to face an "x" day in August (the date when the Treasury will exhaust all cash and special measures and will be unable to meet all payment obligations). Adjustments to Issuance Plans Reduce Supply Shock The gradual cash rebuilding strategy adopted by the Treasury has significantly changed market expectations. Deutsche Bank strategist Steven Zeng pointed out that due to higher deficit spending in July and August, the Treasury cannot quickly replenish the TGA, and more increments will be completed in September. Specifically, this Thursday, the plan is to auction $80 billion of 4-week Treasury bonds and $70 billion of 8-week Treasury bonds, which is an increase of $25 billion from last week. Zeng stated that if the upcoming 6-week Treasury bond auctions also increase by $25 billion, the total issuance of Treasury bonds in July will drop to $157 billion, far below the previous forecast of $278 billion by strategists. This adjustment significantly reduces the potential impact of the "Treasury issuance wave" on the market: "This largely changes the situation, as it not only does not issue bonds in advance but also does not bring upward risks to the issuance expectations in July, instead reducing the short-term issuance volume." Yield Pressure Temporarily Eased Previously, investors remained alert to the potential new debt supply that could push up yields. However, the Treasury's latest plan has alleviated this concern. Barclays strategist Samuel Earl expects that the premium of the 3-month Treasury yield relative to the overnight index swap (OIS) will remain around 3 basis points by the end of the year, rising to 5 basis points next year, indicating that the market is relatively optimistic about the absorption capacity of the supply. Currently, the market is generally focused on the impact of the Treasury's rising cash reserves on the liquidity of the financial system. If the TGA balance increases too quickly, it may withdraw too much liquidity from the system, leading to a decline in bank reserves, which in turn may prompt the Federal Reserve to take intervention measures. Nevertheless, TD Securities strategist Jan Nevruzi stated that the Treasury's medium-term target remains around $850 billion, and according to the 5-day outflow rule, the balance should not fall below $800 billion, with liquidity risks manageable in the short term. Market participants will focus on the guidance from the Treasury during the next bond issuance