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Risk of another US debt ceiling impasse already hitting treasuries

An impasse over raising the debt ceiling could see the US hit the financial buffers in early October failing to meet around 23% of its short term obligations, an analysis by Washington think tank the Bipartisan Policy Centre has said.


Adam Lewis

Analysts are increasingly worried that the Republicans and Democrats will fail to agree to raise the ceiling – the amount the US Treasury is legally allowed to borrow – amid huge policy differences and a febrile atmosphere surrounding the Trump White House.

Treasury Secretary Steven Mnuchin has sent a notification to Congress saying that it is “critical” for the debt limit to be extended by September 29.

The BPC says the US will reach what it is calling the ‘X date’ in early to mid-October exacerbated by a big government payment which falls due at the start of the month.

A large payment is due to the Military Retirement Trust Fund on October 2 2017 – it was $81bn in 2016.

The BPC also notes that there has been a [small] impact on the price of treasuries which mature around this period even with a very small risk of actual default. 3-month T-bills, however, trade around the same level as two weeks ago, suggesting markets do not (yet) perceive a sense of real urgency. 

It notes that during a previous debt ceiling impasse, Fidelity money market funds refused to hold US treasuries maturing in October and early November 2013.

The BPC notes that S&P downgraded US government debt in 2011 and market reaction was not severe. But it adds that there is uncertainty about the effects of another downgrade, since many funds are prohibited from holding non-AAA securities.

The BPC adds: “Financial and economic risks grow as the debt limit impasse goes on. Already, interest rates have risen on short-term Treasury securities that mature around the time Treasury is projected to run short on extraordinary measures and cash on hand.

“Ongoing risks include increasing costs to taxpayers, delayed payments to individuals and businesses, and catastrophic market impacts if the U.S. government actually defaulted on its debt unprecedented in modern history.”

The interest rate on 3-month Treasury bills maturing in late October exceeded that of the 6-month bills issued during the same period (mid to late-July), an unusual occurrence though it did happen during the Great Recession and the 2013 debt ceiling impasse.