By Gertrude Chavez-Dreyfuss
NEW YORK, (Reuters) – While the gridlock surrounding the U.S. debt limit may be temporarily overturned, a long-term solution was also delayed. Although the truce last week helped to calm investors’ nerves, default risk is still a concern ahead of December’s new deadline.
WHAT IS THE DEBT CEILING IN NOW?
After several weeks of negotiations, the U.S. Senate approved a $480 billion increase in the U.S. debt ceiling to reach $28.9 Trillion. Now it goes to the U.S. House of Representatives, where it will be voted on Tuesday. President Joe Biden then can make it law. The bill is likely to provide debt financing through December at the earliest.
Analysts said that this will allow Congress to have more time for a long-term debt ceiling extension via reconciliation. BofA Securities said in a note that U.S. Treasury funding might be extended beyond December, into January or February.
What DOES THE U.S. TRUERY HAVE TO PAY IN ACCORDANCE WITH THE INCREASE OF THE DEBT LIMIT?
About two-thirds (or approximately $480 billion) of U.S. Treasury’s new borrowing authority will be spent by the Treasury within the next few days. In a research note by Wrightson Capital money market research, Wrightson Capital stated that the Treasury must, under law, reinstate trust fund balances that were disinvested in a “debt issuance suspend period” (DISP). Last Friday’s Treasury weekly debt ceiling activity reported that $301 million in non-marketable security owed to government trust funds as of Oct. 6. Wrightson stated that replacing these trust fund securities with traditional borrowing authority will give the Treasury less than $200 billion when the debt limit increase takes effect this week.
HOW WOULD A TREASURY FEEL ABLE TO TAP INTO EXTRAORDINARY MEASURES IF THE $480BILLION RUNS OUT
Wrightson estimates showed that the Treasury will likely use all of its remaining regular borrowing before the beginning of November. Janet Yellen, Treasury Secretary, may need to create a new DISP to allow the department access to its extraordinary measures once more. Wrightson explained that the Treasury now has approximately $300 billion in accounting flexibility, enough to possibly cover all its borrowing for the rest.
TREASURY BILL SUPPLY WILL INCREASE WITH THE RISE in DEBT LIMIT
BofA Securities estimates that there will be an increase of bill supply by more than $300 billion in the near term after the law limiting short-term debt. The estimate is based upon Treasury’s current and target cash balances. Most likely, the bills will be one-month- and short-dated cash management bill.
WHAT ARE THE NEAR-TERM MARKET IMPLICATIONS OF THE DEBT LIMIT EXTENSION?
Due to the extension, there is less risk of a quick-term debt default, even if it has been delayed until December. One-year credit default Swaps, which are very thinly traded and would make it pay in the event of default by the U.S. government, traded last Friday at 14.9 basispoints. This was after they spiked to 28 basis points prior to increasing their debt limit.
Graphic: U.S. sovereign credit default swaps, https://fingfx.thomsonreuters.com/gfx/mkt/znpnezewyvl/US%20CDS%20graphic.PNG
The yields on U.S. bill maturities in October have fallen as well. From nearly 20 basis point last week, the yield for the Oct. 26 maturity dropped to just 4 basis points on Friday. But, yields on the Oct. 26 maturity have fallen to 4 basis points last Friday, from nearly 20 basis points last week. From 4 basis point a week ago, the yield on December 7 maturities rose to 8 basispoints last Friday.
Graphic: U.S. short-term bill yields, https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwlkgkvo/U.S.%20short-term%20bill%20yields.PNG
However, stress is not evident outside the bill market. Investors in the U.S. repo market are closely monitoring the Treasury bills collateral that they have pledged, both for overnight or term trades. Barclays In a research note (LON:), LON stated that although lenders have been keeping an eye on CUSIPs or ID numbers which are sensitive to debt ceilings, they haven’t excluded these from the eligibility lists. This suggests that there is some hope for a resolution to the debt ceiling.