Investors are little closer to knowing just when the US might default on its debts than a week ago and there are signs that they’re getting more worried about the risks posed by the $31.4 trillion statutory borrowing limit.
(Bloomberg) — Investors are little closer to knowing just when the US might default on its debts than a week ago and there are signs that they’re getting more worried about the risks posed by the $31.4 trillion statutory borrowing limit.
The yield premiums demanded by investors for securities that are more at-risk for non-payment have increased relative to other maturities. Meanwhile, rates on those that are most assured of avoiding the potential storm — the very shortest securities — have been pushed lower by overflowing demand from buyers.
All this after a week that saw the Treasury give some insights into how big its 2022 tax take is likely to be and the introduction of a first-gambit proposal by Republican lawmakers in Congress to get the Washington debt-ceiling conversation going again.
Neither of these events did anything to really reduce uncertainty and estimates for when the so-called drop-dead debt will arrive are highly contingent on what happens in the coming days and weeks.
Astute observers say that July or August remain most likely, but some also acknowledge that the risk of not making it through June has increased if tax receipts are as lackluster as they are at risk of being.
Following are some key metrics to watch to figure out just how jittery investors should be.
Bill Curve Dislocations
Investors right now are demanding higher yields on securities that are due to be repaid shortly after the US runs out of borrowing capacity. That’s because the government won’t be able to sell fresh securities and get cash to repay holders.
In past episodes, that’s created unusual kinks in the yield curve around the most vulnerable point and there’s evidence of dislocations appearing at present. Without a specific deadline to coalesce around, investors who are able to are shunning to some degree securities in the June to August period, driving yields there higher. The picture is muddied somewhat by uncertainty over the path of Federal Reserve policy rates, but the amping up of angst is unmistakable.
Insight From Auctions
Auctions in the past week have provided one of the clearest insights of that dislocation. Demand for Monday’s sale of three-month bills — securities that mature right in the danger zone of July — was so lackluster that the yield they had to offer was the highest since Bill Clinton was president in 2001. A one-month auction on Thursday, by contrast, was snapped up at the lowest yield in half a year, well below much of the existing bill curve.
Insuring Against Default
Beyond T-bills, one key market to watch is what happens in credit default swaps for the US government, which have continued to lurch to new highs in the past week.
The Cash Pile
Ultimately, it all comes down to whether the Treasury can stretch out the cash it has on hand right now — and the additional revenue that it will receive over the coming weeks — until some kind of political deal is done. Investors, therefore, are going to be keeping a close eye on how much cash is coming in and going out of the Treasury’s bank account at the Fed.
Receipts from the day of the Internal Revenue Service’s main filing deadline, April 18, were somewhat underwhelming and boosted the cash balance by just $108 billion on the day. All eyes, therefore, are going to be on the ongoing trickle from later payers over the coming weeks to see if that’s enough.
The key hump to get over is June 15, when a batch of corporate tax payments come due. If the Treasury can make it to that point, it can probably also hold on until June 30 when the the Treasury can implement another batch of extraordinary measures — the accounting gimmicks its been using to avoid breaching the statutory cap.
After that, it’s then a question of whether the money lasts until July or August — or even later. But the risk remains — and Wrightson ICAP economist Lou Crandall currently puts it at around 15% — that officials will be on the precipice of running out of cash in June.
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