Debt-Limit Tracker: What to Watch in Markets as Suspension Ends

(Bloomberg) -- The three-month U.S. debt-ceiling reprieve is about to end, putting investors in Treasury bills and other short-term debt on notice.

The September legislation that suspended the limit and funded the government is set to expire Dec. 8. House Republicans have a plan to pass a two-week extension to keep the government open. But lawmakers have yet to take it up as they focus on concluding an agreement to overhaul the tax system.

While markets expect the debt ceiling to be reinstated this week, they anticipate that the Treasury can avoid a breach of the borrowing cap by using extraordinary measures until as late as April. In the past week, investors have started asking for extra yield to own Treasury bills due in mid-April. Meanwhile, the Treasury is shrinking bill auctions to reduce its cash balance to where it was before September’s suspension.

Debt-Limit Tracker: What to Watch in Markets as Suspension Ends

“The debt ceiling is number three on Congress’s list of priorities,” said Thomas Simons, a money-market economist at Jefferies LLC. He had expected Congress would agree on a longer debt-limit suspension in December, but as the “perceived odds of a shutdown have increased, the perceived probability of a punt on the debt ceiling has risen.”

Investors have some key dates to keep in mind:

  • Dec. 22: Expiration of a possible two-week federal-funding extension
  • Dec. 26: Auction of three-month bills maturing in late March
  • Jan. 31: Treasury’s estimate for limit of extraordinary measures
  • Late March/early April: Congressional Budget Office’s drop-dead estimate

Weighing Risks

Senate Majority Leader Mitch McConnell predicted Sunday that the government would remain open past this week. House Minority Leader Nancy Pelosi and Senate Minority Leader Charles Schumer said Monday that they’ve agreed to meet Thursday with President Donald Trump and Republican leaders to discuss a spending deal.

In a shutdown, which last happened in 2013, many federal workers are furloughed and some government functions halt. Investors are more concerned about the risk of failing to reach an agreement on the debt ceiling, without which the U.S. could at some point fail to make timely payments on its obligations.

By Friday, the Treasury will have to drain its cash balance to $70 billion -- the level of the buffer when the suspension went into effect in September -- from its current level of $116 billion. As a result, Treasury slashed the size of Tuesday’s four-week bill auction to $35 billion, from $45 billion.

Deadline Bets

While investors expect this week’s debt-ceiling deadline will pass with little fanfare, they’re more attuned to how long Treasury can borrow without an agreement to suspend the limit again. The CBO projected in a Nov. 30 report that Treasury can keep borrowing until late March or early April without lifting the ceiling, in line with Wall Street estimates.

The Treasury sees a tighter window: It said in its Nov. 1 refunding statement that extraordinary measures will allow the government to meet its obligations only through next month.

“What we’ve said is we can at least pay the bills through January,” Mnuchin said in a Bloomberg Television interview in November.

Investors are gravitating toward the CBO projection. Treasury bills maturing April 12 yield 1.327 percent, just above the 1.322 percent yield on those maturing a week later. The Dec. 26 three-month bill auction also bears watching as the maturity coincides with the CBO’s forecast of when extraordinary measures run out.

Debt-Limit Tracker: What to Watch in Markets as Suspension Ends

Calculating the drop-dead date is complex. One issue is that February tends to be a deficit month for the government as taxpayers expecting refunds typically file earlier than those who owe money. Higher-than-projected refund payments may see the government exhaust its extraordinary measures sooner. 

Another unknown is the tax legislation, which could change debt-ceiling forecasts, according to Wrightson ICAP economist Lou Crandall.

A tax overhaul that’s as “wide-reaching as the one that is likely to emerge from the Congressional conference committee in the weeks ahead will result in other quirks that we are not anticipating,” such as lower corporate tax payments, Crandall said in a note published Monday.

At this point, investors’ full attention is on Congress and its to-do list.

The Treasury isn’t going to default, said Jefferies’ Simons. “So we just have to sit and wait until Congress addresses it, which is, of course, going to come down to the 11th hour.”

©2017 Bloomberg L.P.