The US debt ceiling currently rests at $12.104 Trillion, of which $11.792 Trillion is outstanding as of September 14, 2009.  The debt ceiling is the maximum debt allowed by statute (not including future liabilities, such as Social Security and Medicare).  Any change must be enacted by Congress, and as we quickly approach the ceiling this fall, such a debate would be easily politicized.  In anticipation of such friction, Treasury will be cutting corners wherever it can to continue to issue debt at a record pace, preferably on the long end of the yield curve.  One such corner is the Treasury’s Supplementary Financing Program, which was created in September 2008.  The original press release (emphasis ours):

September 17, 2008

Today, the Treasury Department announced the initiation of a temporary Supplementary Financing Program. The program will consist of a series of Treasury bill auctions, separate from Treasury’s current borrowing program, with the proceeds from these auctions to be maintained in an account at the Federal Reserve Bank of New York. Funds in this account serve to drain reserves from the banking system, and will therefore offset the reserve impact of recent Federal Reserve lending and liquidity initiatives. Treasury Announces Supplementary Financing Program

The program’s original purpose was twofold: (1) it was an accounting trick to help keep the Fed balance sheet in check, and (2) it helped the Fed keep the effective fed funds target rate from slipping to 0% (this was prior to the Fed’s ability to pay interest to banks on excess reserves which eventually allowed it to do the same thing).

In November 2008, as the program hit its peak amount at $558.9 Billion, Treasury announced it would wind down the program.  As of September 9, 2009, there was $199.9 Billion under this line item.  Just released this morning, Treasury will allow the Supplementary Financing amount to drop to $15 Billion as maturing bills are not rolled over, thus creating room for an eventual $185 Billion in longer term debt issuance to the public (emphasis ours):

September 16, 2009
TG-289

Treasury Issues Debt Management Guidance
on the Supplementary Financing Program

Washington – The U.S. Department of Treasury today issued the following statement on the Supplementary Financing Program:

“Treasury currently anticipates that the balance in the Treasury’s Supplementary Financing Account will decrease in the coming weeks to $15 billion, as outstanding Supplementary Financing Program bills mature and are not rolled over. This action is being taken to preserve flexibility in the conduct of debt management policy.”

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However, it will take Treasury some time to roll the $185 Billion into longer term issues (assuming that’s what it wants to do).  And, if the Fed does not concurrently offset the $185 Billion drop on its balance sheet, it will likely be reflected over the coming weeks as a $185 B increase in bank non-borrowed excess reserves (which are by definition total reserves minus borrowed reserves).  As we have noted before, we have found large increases in bank non-borrowed reserves to be correlated with equities gains in this 2009 rally.  The money will need to find a short term home somewhere and, if it is in the hands of the large financial institutions, it can easily be leveraged 100 times or more and pumped into the stock market.

Bottom line–though we believe in the possibility of a correction from the 1066 area of the S&P 500 by tomorrow, this development could be another shot in the arm to subsequently ramp equities in the face of dwindling permanent open market operations, with the side benefit of allowing Treasury to eventually rollover $185 B of short term debt into longer term as it approaches the debt ceiling.