U.S. Debt-Limit Countdown: What Investors Will ScrutinizeBy
Drop-dead date is a ‘moving target,’ Jefferies economist says
Deadline may be anywhere from late February to early April
Investors in short-dated U.S. securities are girding themselves for more skirmishes over the nation’s debt ceiling. Just how to best position for the risk of a potential technical default remains unclear though.
Previous battles over the federal borrowing limit have seen distortions emerge in the short end of the yield curve around so-called drop-dead dates -- when the Treasury Department looked set to run out of accounting gimmicks and exhaust its borrowing capacity.
Without congressional action, the government will once again butt up against the limit of its extraordinary measures -- probably as early as March. But with uncertainties ranging from the impact of new tax laws to refunding plans and the impact of tax season clouding the picture, investors remain stumped about exactly where on the yield curve they should factor in potential risks.
The debt-ceiling deadline is “a moving target, which makes it tough to worry about,” said Thomas Simons, a money-market economist at Jefferies. “I feel little to no confidence in providing an exact date.”
The coming weeks and months will provide clues as to when the final deadline might be, and also about whether Congress might be able to come up with a solution before then. Following are some of the key way stations for investors to be aware of:
Jan. 12: Dealer Questionnaire
The Treasury Department announces details of its funding plans every three months and distributes questions to primary dealers several weeks in advance in order to help shape its plans. The next questionnaire is being circulated this Friday, and what it asks about may give some indication about Treasury’s key preoccupations. It should include a query about economic and fiscal forecasts and also inquire about whether the current financing schedule is suited to meet the government’s needs, but look out for what else might be in there. JPMorgan Chase & Co. strategists led by Jay Barry said in a Jan. 4 note that to avoid having to fully fund widening budget deficits through increased bill sales, the Treasury may need to boost the amount of coupon-bearing issuance at every quarterly refunding announcement this year.
Jan. 19: Continuing Resolution Expires
In addition to tackling the debt ceiling issue, Congress also needs to come to an agreement on spending to avoid a federal government shutdown. And the deadline for that is even sooner than for the debt limit. While the two matters are distinct, they are related and solutions for both could potentially be bundled together. At the very least, developments on spending could color ceiling discussions and affect the timeline for the next round of negotiations. The most recent continuing resolution on spending, which was passed Dec. 21, runs through Jan. 19. Lawmakers are likely to take up a short-term continuing resolution to keep the government running after that, although a deal has proven elusive because of disagreements over immigration policy. A stopgap spending deal, if agreed in time to prevent a partial government shutdown, would provide more time for a longer-term agreement to be hammered out, one that might include a fix on the ceiling.
Jan. 29: Financing Estimates
The government will release its latest financing estimates for the current and upcoming quarters on Jan. 29. While this document won’t give a precise breakdown of issuance plans, it will reveal the total amount it expects to borrow quarter-by-quarter, and also the anticipated cash balance at the end of each period. This in turn could provide insight into Treasury thinking on the debt ceiling. The estimates released back on Oct. 30 showed net borrowing of $512 billion with a cash balance of $300 billion by the end of March, an indication that it thought the debt-ceiling would be resolved sooner rather than later. Watch for clues in what happens to those figures.
Jan. 31: Refunding Statement
With the primary dealers surveyed and financing estimates announced, the Treasury on Jan. 31 will outline the particulars of its issuance program for the coming three-month period. On Nov. 1 it said that it anticipated gradual adjustments to the sizes of its auctions for coupon-bearing debt and two-year floating-rate notes at this upcoming release. Investors will have an eye out to see if Treasury holds firm to that commitment or delays supply increases because of debt-limit concerns.
January to April: Tax Season
One wild card is the potential effect on cash balances of tax refunds. Filings can be made any time from Jan. 29 to April 17, but with those expecting refunds typically going earlier than those who owe money, February tends to end up as a deficit month for the government. If refund payments are higher than projected, there is a risk that the extraordinary measures being used by the government are exhausted sooner, which could pull forward the drop-dead date. The recent passage of new tax laws also throws an extra variable into the mix.
Mid-to-late February: Smaller Auctions
If the debt ceiling is still looking problematic in mid-to-late February, the Treasury may reduce the size of bill auctions to make room for the coupon-bearing sales it plans to do, Wrightson ICAP economist Lou Crandall said Jan. 2. That would also reduce the volume of late-March maturities that could be “potentially toxic” if Congress is struggling to resolve the ceiling issue as the drop-dead date nears. Bills maturing in late March and early April are seen as the securities most likely to show distortion if worries emerge, potentially creating the kind of yield curve kink that’s occurred in past ceiling episodes. As it turns out, the Treasury has already started slashing the size of its four-week bill auction. It plans to sell $45 billion on Jan. 16, down from $50 billion at the previous sale which took place earlier this week.
Feb. 28: Mnuchin’s Deadline
While analysts are trying to estimate just how long the extraordinary measures might last, Treasury Secretary Steven Mnuchin is said to have told Republican congressional leaders that he wants them to raise the government’s borrowing authority by the end of February. During the 2017 showdown, Mnuchin said he would prefer Congress deal with the debt ceiling before leaving for its August recess, and that Treasury believed the cap should be increased no later than the end of September. Congress ultimately settled on a short-term resolution in early September that put the matter off until the current episode.
March or April: A Later Deadline?
Not everyone is convinced that Mnuchin’s current deadline is the final line in the sand. A Congressional Budget Office analysis released on Nov. 30 projected that the U.S. Treasury could continue borrowing without having to lift the debt ceiling until late March or early April. Bank of America strategist Mark Cabana said in a Jan. 5 note that the new tax law and its impact on worsening the budget deficit will pull forward the potential drop-dead date -- but even he is estimating that cash will only fall to “precariously low” levels around March 9. Regardless of the date though, the countdown is on and short-end investors will be keenly attuned to any signs of progress or impasse from Capitol Hill.
— With assistance by Mark Tannenbaum, and Derek Wallbank