Wall Street Eyes August as Possible Drop-Dead Date for Debt Ceiling

(Bloomberg) -- The U.S. debt ceiling won’t be reinstated until March and the Treasury will likely find ways to extend funding for some months after that, yet Wall Street analysts are already crunching numbers to determine just when the government’s borrowing authority will finally be exhausted.

Once the debt limit suspension ends on March 1, Treasury Secretary Steven Mnuchin is expected to once again deploy extraordinary funding measures to keep the cash spigot open for as long as possible. In addition to figuring out how much headroom that will create, uncertainties about the volume of April tax receipts also complicate the calculation, but strategists at both Royal Bank of Canada and Bank of America are tentatively penciling in some time in August for the government’s so-called drop-dead date.

Michael Cloherty, a New-York based strategist at RBC, said in a note published on Tuesday that the Treasury may even be able to defer the deadline to mid-September, though there will be “very little confidence in that forecast until the April tax season is complete.”

Bank of America strategists Mark Cabana and Olivia Lima said the ongoing shutdown of the federal government raises the risks of a challenging fight in Washington around the debt limit.

Market Volatility

A prolonged standoff over the borrowing cap will lead to volatility in U.S. money markets, they said in a note published Wednesday. This will stem first from swings of around $100 billion in Treasury bill supply leading into and out of the March reinstatement. It will then be followed by a surge in bill supply after the debt ceiling issue is resolved to allow for a “sharp rebuilding” of the government’s cash balance, they wrote.

Fitch Ratings has noted that the debt-limit issue is a risk factor for the U.S.’s AAA credit score, but said it wouldn’t review the rating until the “x-date,” when extraordinary measures may be exhausted.

“What this shutdown -- and the length of it -- shows us is that it is no easier today for Congress to make these funding decisions and work together,” Charles Seville, a senior director at Fitch Ratings, said in an interview. “That affects our thinking on how medium-term challenges will be dealt with, and also how the debt-limit’s own challenges will be dealt with.”

Moody’s Investors Service said that while the March 1 date creates policy challenges, simply reaching that deadline would not prompt them to downgrade the U.S. or shift its outlook. The credit assessor reckons that the Treasury’s extraordinary measures are most likely to “last into the summer.”

“Passing March 1 just starts the clock for Congress to come to an agreement with the White House to raise the debt ceiling,” said William Foster, a senior credit officer at Moody’s. “And we’d certainly expect that to happen, as they have done in the past. That is our base case.”

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