As of 8th October, the Treasury had $32bn of cash balance and $92bn in debt manoeuvre capacity, according to our estimates. The sum of these two, $124bn, reflects the actual payment capacity of the government. The Treasury can shift funds between the cash balance and debt manoeuvre capacity by issuing cash management bills or shrinking/ raising regular bill sizes, within the overall payment capacity.
October 17th: The Treasury will run out of debt capacity. However, we do not attach any importance to this date, as payment capacity will still be $70bn, according to our estimates. According to the Treasury, they will be down to $30bn in cash by October 17th, suggesting they can continue to meet their bills for a number of days longer. But the date maintains symbolic and political importance for the negotiators, so the passage of this date without a deal would likely be met by a risk-off trade. Also, after this date, all coupon bond auctions would likely be deferred in favour of rolling cash management bills.
October 31st: Payment capacity drops gradually to $22bn on October 31st, still enough to pay the $6bn coupon and roll over the bills maturing on this date, according to our estimates.
November 1st: The Treasury’s payment capacity will run out due to large Social Security, Medicare, defence, and veterans payments of around $67bn. We project that only half the payments on this date can be made. It is very unlikely that the Treasury will be able to pay all its obligations on time on or past this date. However, it is conceivable that bills maturing after Nov 1st can still be rolled over with new issuance, since the effective interest that needs to be paid every week is around $10mn, a rounding error in budget terms.
November 15th: The Treasury would theoretically almost certainly default on its debt, if no debt limit deal is reached by then, since the coupon payment of $31bn is exceptionally large. There is still some uncertainty to our forecasts, but so far, the daily cash flows would tend to cause an extension of the deadlines, given the effect of the shutdown that has reduced expected federal outlays by about $2bn per day. One uncertainty is the purchase of Treasuries for the highway trust fund on Oct 15, but we do not expect it to be large enough to make a difference to the crucial Nov 1 and Nov 15 deadlines.
We still expect a last minute deal to avoid a US default, but this will most likely be a temporary solution. A short-term deal to raise the debt-ceiling by 4-6 weeks could pass
soon and will provide markets with some relief. However, as long as part of the US government remains closed, the economy will increasingly feel the pain. A temporary agreement that also includes the continuing resolution would be a positive surprise. But even in this case, the time that such a deal would buy could be wasted without a permanent solution.
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