Debt Ceiling Update

The US debt ceiling looms. The House Republicans are still formulating their strategy. Treasury Secretary Lew has said his ability to maneuver will be exhausted by February 27.   While this sounds like ample time to avoid a delayed payment or default, the problem is that Congress recesses this Wednesday and will not return for a full day session until February 26.   Time is really of the essence.   Moreover, officials seems vaguely unaware of how it undermines US prestige after the government shutdown in Q4 last year. 

The word from Washington is that the House Republicans are looking for a face saving way to avoid a confrontation.   To this end, efforts to repeal or delay parts of the Affordable Care Act (Obamacare) have been jettisoned.   The two demands that have received the most press attention do not seem particularly controversial. They include reversing recent changes to the cost of living for the military personnel and updating the rate at which doctors that treat Medicare patients are reimbursed (Sustainable Growth Rate).   

However, there does seem to be a technical glitch of sorts with the Sustainable Growth Rate.  A bipartisan group in Congress submitted a bill last week that eliminated it completely.  The temporary fix suggested as part of a deal to lift the debt ceiling is seen as threatening the effort for a longer term solution and is opposed  by powerful industry interests like the American Medical Association. 

The Democrats in both chambers and the White House want a clean bill; that is one without any policy strings attached. A bill in the House of Representatives will require support from the Democrats because there are around 30 Republicans that are unlikely to support an increase in the debt ceiling no matter what.    

We have likened the debt ceiling debate to going to a restaurant, eating the meal and debating about whether to pay the bill when it arrives.  The government's spending was authorized.  The fact that the government may not be authorized to make good on its debt makes little sense to many inside as well as outside the US. 

A deal, which will eventually take place, is expected to raise the debt ceiling until after the November mid-term elections.  There was talk before the weekend of a full year extension.  Part of the problem is that this time of year, heavily laden with tax refunds, the federal government has relatively high needs for cash. This is reflected in the increase size of US bill auctions. 

Owing to the unresolved debt ceiling, the Treasury Department seems more reluctant to expand its issuance of 4-week bills, but has increased the supply of 3- and 6-month bills and cash management bills. Some dealers warn of an increase in general collateral rates of 3-5 bp, but potentially more tomorrow and Thursday due to the settlement of bills.

While we have not talked with any one that actually expects the US to default on its debt, the risk of disruption does weigh on some investors.  Investors, for example, appear to be avoiding T-bills maturing over the next several weeks.