Biden Warning Ratchets Up Jitters: Debt Ceiling Anxiety Tracker
Treasury Bill Curve Bends to New Government Insolvency Date
(Bloomberg) -- Dislocations in the U.S. Treasury bill curve extended as investors become more concerned about the government potentially exhausting its borrowing authority, especially after President Joe Biden warned that the government is at risk of breaching the legal limit on its debt in two weeks.
Asked after a White House speech on the debt-limit dispute whether he could guarantee the U.S. wouldn’t exceed the ceiling on its debt, Biden answered: “No, I can’t.”
The yield on the Oct. 21 maturity climbed as much as 5 basis points to 0.12% Monday, with most bills maturing earlier and later yielding 0.05% or less. However, the Oct. 26 maturity is also trading cheap versus the rest of the curve. Investors had already been shying away from bills due in late October and early November, viewed as most at risk of delayed payment if a legislative agreement to raise or suspend the debt limit isn’t reached.
U.S. Treasury Secretary Janet Yellen said last week that action is needed by Oct. 18, while a report from the Congressional Budget Office released Wednesday said the department is likely to exhaust its ability to borrow as soon as late October or early November if politicians in Washington fail to raise America’s so-called debt ceiling in time.
The Treasury’s cash pile plunged to $132 billion as of Oct. 1, the lowest since August 2019, according to data published Monday. It will sell a $25 billion eight-day cash management bill on Tuesday to bolster its coffers before the mid-month Treasury coupon auctions settle on Oct. 15.
Avoiding Bills
If the U.S. runs out of borrowing capacity, debt maturing immediately afterward might not be repaid on time. Investors in those securities are therefore demanding compensation for the risk in the form of higher bill yields. Longer-dated bills normally pay higher rates than shorter ones, but for now, mid-October and early November maturities have higher yields than ones maturing later.
Wrightson ICAP pinpointed the so-called drop-dead date on Oct. 25, but acknowledged that the range of uncertainty around the forecast remained wide. Bank of America strategists said they estimate the x-date is between Oct. 20 and Nov. 1, but if forced to predict a precise date noted it would be the latter, while Jefferies economists said they believe the deadline is no later than Nov. 4.
This “very rough, back-of-the-envelope type calculation” suggests that “Treasury can maintain both a net positive cash position and a sufficient amount of EMs to continue with the coupon auctions at current sizes at least through the end of October,” Jefferies economists Thomas Simons and Aneta Markowska wrote in a note, referring the Treasury’s extraordinary measures. “However, the beginning of November is when things will get very tricky for Treasury.”
Full Speed Ahead for Reverse Repo
Meanwhile, investors in need of an alternative to certain T-bills are flocking to the Federal Reserve’s facility for reverse repurchase agreements. That’s adding to demand created by T-bill supply cuts made in an effort to keep the debt load under the ceiling. Usage of the facility increased to a record high on Thursday, related to quarter-end, the high-water mark for the week, but perhaps not for long.
Smaller Buffer
One of the starkest proxies for debt-ceiling risk is the Treasury’s cash pile. Inflated by fiscal stimulus and Fed asset purchases, the cash balance exploded to a record $1.83 trillion in July 2020, but has since dwindled to around $132 billion, the smallest since August 2019. A large part of that drawdown was mandated by the reinstatement of the debt ceiling at the start of August. But the pile is now well below what the Treasury itself had forecast for the end of the third quarter. The upshot is that the government has less of a buffer to pay its bills if there’s a disruption in debt markets.
Meanwhile, the department said in a statement Friday that around $173 billion of headroom remained as of Sept. 29 under extraordinary measures that have been put in place to avoid the government breaching its debt ceiling, assuming the Debt Issuance Suspension Period ends on Oct. 18.
Still, Wrightson ICAP economist Lou Crandall projects the cash balance will fall below $90 billion by Oct. 6 due to fiscal withdrawals that are concentrated at the beginning of the month, and will have less than $35 billion of unused extraordinary measures remaining on that day.
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