Societe Generale with a useful primer on the forthcoming Congressional circus.
The US Treasury invoked ‘extraordinary measures’ on 19 January to continue to issue debt to meet its obligations, having reached the debt ceiling of roughly $31.4 trillion. Although the deadline for raising the debt ceiling (the X-date) is not an immediate concern, a divided Congress and potentially higher risks of political brinkmanship are shining a spotlight on this issue.
In terms of timing, the Congressional negotiations are most likely to drag on right up until the X-date. The extraordinary measures and the April tax receipts should allow the Treasury to finance operations until the summer. However, weak tax revenues could pull the X-date forward to June. The Treasury should offer better guidelines at the end of April. Chances of a technical default may be modest, but loom larger than in earlier episodes. Partisan politics are deeper. We do not see major economic risks, but a technical default and the approach of the X-date could be disruptive for the markets. Volatility could exert the necessary pressure for Congress to act.
In our base case we expect the Treasury to be able to continue to issue notes and bonds at current issuance sizes at least until mid-year and potentially into August or even September, depending on incoming tax receipts. Hence the debt ceiling needs to be raised (or suspended) by mid-year to avoid a technical default.
We take a closer look at what happened in 2011. T-bills maturing closer to the X-date could cheapen as the risks of a technical default rise. As of now, we see no evidence of such concerns in the bill curve, but we will be monitoring tax receipts and the evolution of the cash balance closely to get a better idea of the X-date and the potential impact on the yield curve and the cross currency basis, if the debt ceiling is not raised in a timely fashion.
Extraordinary times
