- Washington faces a budget battle to raise the debt ceiling and avoid default.
- The Treasury is using extraordinary measures to maintain payments, with funds depleting rapidly.
- But Treasurys with maturities nearing the date when the cash runs out are trading cheaply.
It’s that time again when Washington braces itself to go to battle over the budget and raise the debt ceiling so that the government can continue to meet its obligations.
In the meantime, the show must go on. Last month, the Department of the Treasury enacted “extraordinary measures” to keep payments going and prevent the government from defaulting while Congress figures things out. Those measures include redeeming investments while stopping new or recurring investments and halting state and local Treasury sales.
When that happens, it means things are pretty tight. But how tight exactly will get clearer after April’s tax filing deadline, showing how many tax refunds need to be issued. For now, Ira Jersey, the chief US interest rate strategist at Bloomberg Intelligence, estimates that the government will run out of money between late July and August. However, until there’s a final decision on the debt ceiling, that target could keep changing as Bloomberg’s debt model ceiling updates every two weeks, and by June, every day.
“March, in particular, is a massive deficit month,” Jersey said. “So we could see between now and the end of March another $300 billion and maybe even more paid down in cash balances.”
Below is a chart that shows where payments have been coming from since the extraordinary measures program began in January. The green bars represent the Thrift Savings Plan (TSP), or the “G Fund,” which are investments in Treasurys that are rapidly depleting, even before tax refunds have been issued. The yellow line represents the Treasury General Account, a deposit with the Federal Reserve that functions like the government’s checking account. These key cash reserves have also begun rapidly depleting as the Treasury resorts to spending more of its cash amid declines in the G-Fund.
Bloomberg Intelligence
T-bill exposure
The situation sounds more doomy than it is. It’s not the first time Washington has come this close to the brink, and investors know that their bonds will be met with payment. However, it could be a day or so late if the debt ceiling isn’t raised in time.
“Everyone is pretty sure that any securities that aren’t paid on time are going to get paid the day after or two days later,” Jersey said. “But if you’re a cash manager, you need that money today. You need certainty that you’re getting repaid on the day that you’re supposed to be. So because these bills are kind of in the crosshairs of when the government would run out of money, they’re trading cheaper.”
When bond prices cheapen, their yields rise, and Treasurys maturing around August 1 are now carrying yields a few basis points above those around them, Jersey said.
While Treasurys maturing in the close range before or after August 1 are less attractive to some market participants, they carry a yield that’s a few basis points above those around them, Jersey noted. In the past, investors who weren’t spooked by possible payment delays or liquidity strains have been willing to take on that risk and buy those Treasurys, picking up 5 to 15 basis points over other bills, he added.
“Eventually, probably, you’ll see those T-bills trade even cheaper if we get reasonably close to the X date,” he said, referring to the nickname for when the government could start struggling to meet its obligations. “And once that happens, maybe Congress will wake up, and they’ll actually do something about it.”
If Congress wanted, they could raise the debt limit tomorrow. But in the past, things are usually decided at the 11th hour. On a lighter note, despite Republicans taking a hawkish approach to government spending, Jersey believes increasing the limit could be easier this time since one party controls both houses of Congress and the presidency, which may mean less infighting or using the issue as a bargaining chip.
On Wednesday, House Republicans passed a budget resolution that included a $4 trillion increase to the debt limit. It will next need to move through the Senate.
