T-Bill Tantrum: Yields Spike As Debt-Ceiling Anxiety Begins To Show
US default risk has flatllined for weeks, market risk has leaked to record lows, and Treasury Bills have ‘behaved’… until now. The last two days have seen a sudden aggressive spike in the yields of T-Bills around mid-October, inverting the yirld curve as debt-ceiling anxiety starts to build quietly away from NFLX and AMZN shares.
And the yield curve has inverted as analysts start to consider the chances of a two-week government shutdown as a base-case…
For now there is no perturbation in the VIX curve for the same period.
This move should not be a total surprise to readers as the CBO warned recently that Treasury will run out of cash in mid-October.
With Trump tax reform far on the backburner, the CBO reminded that in just 3 months a more material threat is facing the US: according to the latest CBO calculations, the Treasury will “most likely” run out of cash in early to mid-October, unless the most polarized Congress in history raises the debt ceiling.
This is what the CBO just said in its latest report on the “Federal Debt and the Statutory Limit”, released moments ago.
If the debt limit is not increased above the amount that was established on March 16, 2017, the Treasury will not be authorized to issue additional debt that increases the amount outstanding. (It will be able to issue additional debt only in the amount of maturing debt or the amounts cleared by taking extraordinary measures.) That restriction would ultimately lead to delays of payments for government programs and activities, a default on the government’s debt obligations, or both. CBO estimates that without an increase in the debt limit, the Treasury, by using all available extraordinary measures, would most likely be able to continue borrowing and have sufficient cash to make its usual payments until early to mid-October of this year.
In recent weeks, Treasury Secretary Mnuchin has urged Congress to lift the debt limit before its August recess (with others calling to abolish it altogether) although he also conceded that the nation can likely pay its bills if action waited until September, which is all lawmakers needed to know they don’t have to rush until the very last minute.
He has also warned that the closer the U.S. gets to breaching the debt ceiling in mid-October, the more likely financial markets are to react unfavorably, although that warning appears to have been negated by his first one. On Thursday following the release of the CBO report, he again urged Congress to take action.
“For the benefit of everybody, the sooner that they do this the better,” he said at a White House briefing, although he once again diluted his case by adding that “we have contingency plans” if Congress doesn’t raise debt ceiling by a certain date, so the market “shouldn’t be concerned.” Which is all the market needed to know to keep rising until some time in early October, when it freaks out again.
Furthermore, as Cowen’s Chris Krueger wrote today, a government shutdown is now more likely than tax relief.
Cowen doesn’t agree with conventional wisdom that tax changes are now easier because GOP self-preservation will kick in, and no longer has tax cuts next year in its base case.
Two-week October shutdown now part of base case; recalls Donald Trump’s animosity about media reporting on “bad” April govt funding deal and Democratic cheering; expects much tougher White House negotiating perspective on core issues, including Mexico border wall, Planned Parenthood, EPA and defense spending.
Health care may reappear post-Labor Day, with expiration of 5-year funding authorization of SCHIP program for children, pregnant women on Sept. 30; may become vehicle for some type of ObamaCare repair operation.
Of course, don’t tell the equity markets, we would not want them getting all worried about the world’s reserve currency’s status…