Brace for US debt limit debacle

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We are about to find out whether MMT or austerity will define the next business cycle. BofA.


Treasury bill boost likely pulls closer debt limit bind date

On Tuesday, the Treasury announced increased bill auction sizes for the 1m, 2m, and 4m bills, in addition to a $60bn CMB. This is on top of increased 3m and 6m bill auction sizes announced last week. The Treasury only has $59b in headroom left before they are constrained by the debt limit(DL) and these higher bill auction sizes will likely draw them closer to that limit sooner than we had previously expected (Exhibit 1). We previously projected net bill supply in Jan of roughly $50b, followed by nearly $50b in cuts in February. The bill supply announcements this week put Treasury on a path to issue $100b more bills than expected & likely reach the debt limit before any Feb cuts. The larger bill supply size likely implies UST is nearing an announcement of extraordinary measures (EM). EM cannot be announced until Treasury has hit the debt limit and entered a debt issuance suspension period (DISP). Recall, EM are accounting maneuvers UST employs to create additional headroom for a finite amount of debt issuance. We project UST has around $350b of EM available (Exhibit2). In Exhibit 3, we present the schedule of upcoming UST settlements. Data between now & Jan 19 is known, based off UST auction announcements. Data after Jan 19 is expected settlement sizes based on most recent bill announcements. It currentlylooks like UST will be required to employ extraordinary measures (EM) by Jan 19 due to the large CMB settlement. The only way for Treasury to avoid hitting the debt limit by the 19th is a large redemption in non-marketable debt, which also counts towards the limit. It seems likely the debt limit will bind next week.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.