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Repo Market Volatility and the U.S. Debt Ceiling

Author

Listed:
  • Mai Dao
  • Brandon Tan
  • Jing Zhou

Abstract

Recurring debt ceiling standoffs cause political disruptions and economic costs. We quantify one type of cost which is receiving growing attention: the spillover to short-term funding markets. Using high-frequency aggregate as well as granular money market fund specific data, we find that flows in and out of the Treasury General Account triggered by the debt ceiling mechanism can create large swings in the repo spread and distort the supply of repo funding for the Treasury market. Applying our estimates to the expected debt ceiling lift-off in summer 2025 implies that the repo spread could fluctuate by 20-30 basis points around the lift-off date. A higher level of aggregate bank reserves and overnight reverse repo balance at the Fed can dampen the impact on funding spreads appreciably.

Suggested Citation

  • Mai Dao & Brandon Tan & Jing Zhou, 2025. "Repo Market Volatility and the U.S. Debt Ceiling," IMF Working Papers 2025/127, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2025/127
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