Markets are on edge over whether budget talks will produce a solution to the U.S. debt-ceiling crisis as the window for averting a potential default narrows by the day, and the amount of room the Treasury Department has under the statutory borrowing limit dwindles.
The Treasury said in a statement Friday that it had just $88 billion of extraordinary measures remaining as of May 10 to help pay the government’s bills. That’s down from around $110 billion a week earlier, and it means that just over a quarter of the $333 billion of authorized measures are still available to keep the U.S. government from exhausting its borrowing room under the debt limit. Treasury Secretary Janet Yellen said this month that her department could run out of cash as soon as June 1 and Treasury markets have shifted to price in a default premium for securities maturing around that date. The cost of insuring U.S. debt against nonpayment has also soared.
President Joe Biden and House Speaker Kevin McCarthy are poised to reconvene Tuesday after staff-level talks held over the weekend, with the White House sending signs of guarded optimism. Biden said talks were “moving along” while National Economic Director Lael Brainard said the negotiations were serious and constructive. The meeting will offer a key test of whether the two sides can reach a deal before a potential default in June — and it comes before Biden leaves Wednesday for a trip to Japan, Papua New Guinea and Australia.
But there are many in financial markets predicting or hoping that some kind of deal will get done, in part because that’s what’s always happened, even when things have gone down to the wire.
From Washington to Wall Street, here’s what to watch to gauge how worried observers should be and when they should be concerned.
The Bills Curve
Investors have historically demanded higher yields on securities that are due to be repaid shortly after the U.S. is seen as running out of borrowing capacity. That puts a lot of focus on the yield curve for bills — the shortest-dated Treasury securities — and any dislocations that show up. Noticeable upward distortions in particular parts of the curve tend to suggest increased concern among investors that that’s the time Uncle Sam might be at risk of default. Right now that’s most prominent around early June.
Money-market funds made a “notable shift” toward shorter-maturity Treasury bills in April: Holdings of bills maturing within 30 days made up 74% of total T-bill holdings at the end of April from 43% at the end of March, according to JPMorgan Chase & Co. At the same time, bills maturing in more than 60 days declined to 9% of bill holdings from 13% the prior month, while securities in the 31- to 60-day bucket dropped to 17%, from 44%.
Underpinning the various moves in debt markets are differing estimates about when the government might exhaust its options to fund itself — commonly referred to as the X-date. While the administration has provided guidance that it might fall short as soon as June, prognosticators across Wall Street have also been running the numbers based on government cash flows and expectations around taxes and spending. Some strategists have pulled forward their estimates to align more with forecasts out of Washington. Others, meanwhile, are staying with late-summer projections. To be sure, recent cashflow figures from the Treasury suggest that it’s even more unclear whether the department will make it until June 15, a key tax payment day. Treasury’s latest headroom forecast suggests the low point in the department’s overall fiscal resources in the second week of June will still be above zero, but “much too close for comfort,” Wrightson ICAP economist Lou Crandall wrote in a note to clients.
Insuring Against Default
Beyond T-bills, one other key area to watch for insight on debt-ceiling risks is what happens in credit-default swaps for the U.S. government. Those instruments act as insurance for investors in cases of nonpayment. The cost to insure U.S. debt is now higher than the bonds of — among others — Greece, Mexico and Brazil, which have defaulted multiple times and have credit ratings many rungs below that of the U.S.
The Cash Balance
The U.S. government’s ability to pay its debts and meet its spending obligations ultimately comes down to whether it has enough cash, so the amount sitting in its checking account is crucial. That figure ebbs and flows from day to day depending on spending, tax receipts, debt repayments and the proceeds of new borrowing. And if it gets too close to zero for the Treasury’s comfort that could be a problem.
Wrangling in Washington
Ultimately though, any fix will need to come from Washington. There aren’t that many days this month when both chambers of Congress are available and Biden is also scheduled to be in the U.S. capital, meaning there isn’t a lot of time to waste to reach a deal before the X-date. Biden, McCarthy and other congressional leaders plan to meet Tuesday to discuss budget negotiations to avoid a default.