The US debt ceiling problem looks sorted

I have been watching the US debt ceiling story develop, and wondering when the Democrats are going to fold and focus on the responsibilities of power. It looks like they have done so.

According to Bloomberg, House Speaker Nancy Pelosi has just had her ‘whatever it takes’ moment. She is reported as saying:

“Whatever it is, we will have a CR that passes both houses by September 30,” at a press briefing Thursday.

So, there must have been a change of strategy. It seems very likely that there’s going to be a continuing resolution to fund the federal government by 1 October. There’s still the debt limit, but whatever it takes means whatever it takes. So that’s going to get sorted too.

The Democrats have the Presidency, the House and the Senate. They can 100% get both done. It’s just a question of precedent and strategy.

Some Democrats had already started telling reporters they were in favour of doing it solo. The comments from Pelosi suggest that she agrees. I think that’s right. They are governing: not having the government shut down seems like a priority. Same for not having a default.

Crisis over = basis tighter

It follows that the recent basis widening at the US short end is probably over. And that we’re due a reversal.

How much can it move? Certainly 3bps, and perhaps up to 5bps. Spot FRA-OIS was 2.6bps earlier this year, and it’s 5bps now. That should come in a bit. And the spread between spot and Dec could easily come in 2bps or so.

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