Jan 9, 2023
Debt-Cap Risks for Markets to Intensify If Stopgap Deals Are Used
, Bloomberg News
(Bloomberg) -- The US is expected to run up against its statutory borrowing cap later in the year, and the risk is that lawmakers may resort to a series of can-kicking measures that wind up roiling financial markets.
That’s the view of Wrightson ICAP economist Lou Crandall. He said the past week’s chaotic developments around choosing a House speaker make it more likely efforts to raise or suspend the government’s limit will result in a series of short-term agreements until a longer deal can be reached.
“A dysfunctional Congress could force the Treasury to live hand-to-mouth through a series of interim debt-ceiling increases for weeks or even months,” Crandall wrote in a note to clients Monday.
Some members of Congress might see an advantage in aligning the debt-ceiling and government-shutdown deadlines in order to produce “maximum leverage,” according to Crandall. So it’s possible both timelines are pushed back repeatedly, either separately or together.
An orderly resolution to the debt ceiling could unleash hundreds of billions of dollars of Treasury bill supply over months to fixed-income investors flush with too much cash and too few places to park it. But any kicking of the can on the issue risks aggravating existing imbalances in the very front end of the fixed-income markets.
Officially, the government is $69 billion away from reaching the $31.4 trillion statutory limit. But the Treasury has historically employed various extraordinary measures to avoid exceeding the cap. These include slashing the amount of Treasury bills it issues, spending down cash it keeps parked at the central bank and suspending payments to government trusts.
When and how these measures are enacted — and exactly which ones the Treasury chooses to use — will help determine the final cutoff date. So too will the flow of government outlays and receipts.
Wrightson estimates the Treasury would fully exhaust its resources in August, though the department could draw its line somewhat earlier, prompting Congress to act sooner.
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