Fiscal battles in Washington D.C. over raising the debt ceiling continue to be the primary focus of market participants this week.
October 17 is the day that the Treasury has said it will hit its borrowing limit, but it won’t run out of cash for a few more weeks even if there is no deal by then.
In a note to clients, BofA Merrill Lynch interest rate strategist Marcus Huie says November 15 is probably the real drop-dead date for the Treasury, at which point it would have to default on short-term obligations:
As of Tuesday, 8 October, the Treasury had $US32bn of cash balance and $US92bn in debt manoeuvre capacity, according to our estimates. The sum of these two, $US124bn, reflects the actual payment capacity of the government. The Treasury can shift funds between the cash balance and debt manoeuvre capacity by issuing cash management bills or shrinking/raising regular bill sizes, within the overall payment capacity.
October 17 is the date specified by the Treasury that the debt capacity will run out. However, we do not attach any importance to this date, as payment capacity will still be $US70bn, according to our estimates. But the date maintains symbolic and political importance for the negotiators, so the passage of this date without a deal would likely be met by a risk-off trade.
Also, after this date, all coupon bond auctions would likely be deferred in favour of rolling cash management bills, with the announcement of the 30y TIPS reopening on this date the initial test case.
Over the following several weeks, payment capacity drops gradually to $US22bn on October 31, still enough to pay the $US6bn coupon and roll over the bills maturing on this date, according to our estimates.
November 1 is when payment capacity runs out, due to large Social Security, Medicare, defence, and veterans payments of around $US67bn. We project that only half the payments on this date can be made. It is very unlikely that the Treasury will be able to pay all its obligations on time on or past this date.
However, it is conceivable that bills maturing after Nov 1 can still be rolled over with new issuance, since the effective interest that needs to be paid every week is around $US10mn, a rounding error in budget terms.
November 15 is when the Treasury would theoretically almost certainly default on its debt, if no debt limit deal is reached by then, since the coupon payment of $US31bn is exceptionally large.
“There is still some uncertainty to our forecasts, but so far, the daily cash flows would tend to cause an extension of the deadlines, given the effect of the shutdown that has reduced expected federal outlays by about $US2bn per day,” says Huie.
“One uncertainty is the purchase of Treasuries for the highway trust fund on Oct 15, but we do not expect it to be large enough to make a difference to the crucial Nov 1 and Nov 15 deadlines.”