US ‘drop dead’ date is late October

My view is that the responsibilities of power eventually dominate political strategy, and my read is that there’s already been a change in tone from Pelosi that suggests softening — so it seems very likely that there will be a ‘fix’ to increase the debt ceiling and avoid default. My guess is that the ‘fix’ will proceed along partisan lines.

Having said that, there is no deal just now. It’s probably a bit too soon. The key date seems to be 15 October. So we’ll probably see a deal come into focus during the first week of October.

According to very nice work by the Bipartisan Policy Center, the X-date (the date at which the US Government is unable to pay all bills in full and on time) is somewhere between 15 October and 4 November. There’s a fair bit of uncertainty about the exact date, which is why they have the X-Date shaded as red in the below chart.

I found the BPC’s day-by-day estimates of inflows and outflows really helpful. The chart below shows the net cash deficit each day, and the cumulative cash deficit. The big cashflow deficit days are Wednesdays, Monday 1 November, and Monday 15 November (though it’s unlikely they could last that long without a deal). Of course, you can run out of money any day of the week — but there are options which make going broke on the smaller days a bit less likely.

There’s also about 430bn of debt that must be rolled over in the second half of October. My assumption is that the US Treasury will be able to roll over all this debt as it matures (so it doesn’t appear in the above calculations). Markets could get a bit choppy in late October if the Treasury is rolling maturing debt without a deal.

I doubt it’ll come to that. When you hold the Presidency, the House, and the Senate, you own the game. If it breaks, it’s your fault. An unprecedented default is worse than the distasteful precedent of using reconciliation to lift the debt ceiling.

In an amusing note on the situation, Senator Mitch McConnell estimated that it’d take about a week to lift the debt ceiling via the budget process. So expect to see movement during the first full week of October.

I think a ‘fix’ will tighten USD front end basis — perhaps pulling Dec IMM FRA-OIS down by as much as 5bps. With 1.3tn in the Reverse Repo facility, there little risk of short end rates rising due to an increase in bill issuance (bill issuance sometimes increases after the debt ceiling is increased). So it’s all about risk premium.

Leave a Comment