While DC may continue playing its debt ceiling soap opera, crunch time for the Treasury is approaching as the first of three auctions is on deck: the first one for $32 billion in 3 Year Notes. The total raised will be $72 billion without any offsets from maturities. Elsewhere, the Treasury will catch a $16 billion break after it settles $100 billion in Bill maturities offset by $84 billion in new issuance, yet still the net total of $56 billion in new debt seems to be a slight problem since as of Friday, there was just $23 billion in total capacity under the debt ceiling. Granted, the Treasury has already announced it is commencing the tapering off of other debt programs such as the State and Local Government (SLGs) which however will have at most $5-10 billion in favorable impact per month. It is also cutting its debt issuance forecast in half, likely due to an expectation of maturing old Bills without rolling these, a feat which will consume all if not more of the $108.9 billion in total cash available at the Treasury. So that's the math, and now back to the theater, where Politico reports speaker John Boehner "will call on Congress to offset a debt ceiling hike with spending cuts of a greater amount, an ambitious proposal that puts House Republicans on a collision course with Democrats who want much more modest spending restrictions attached to the vote."
“Without significant spending cuts and reforms to reduce our debt, there will be no debt limit increase,” Boehner plans to tell the Economic Club of New York here this evening, according to remarks obtained by POLITICO. “And the cuts should be greater than the accompanying increase in debt authority the president is given. We should be talking about cuts of trillions, not just billions.”
Under Boehner’s vision, for example, Republicans would have to find more than $2 trillion in cuts if they wanted to raise the debt ceiling by that amount through 2012 — which is in line with Treasury’s estimates on the debt limit. But Republicans could also go for a more incremental increase in the debt ceiling, coupling that with a smaller offsetting cut in spending.
But by mentioning “trillions” in long term cuts, Boehner is clearly putting entitlement reform in play — including Medicare — since it would be near impossible to cut trillions without affecting entitlement spending.
Boehner will say that “everything is on the table … that includes honest conversations about how best to preserve Medicare, because we all know, with millions of Baby Boomers beginning to retire, the status quo is unsustainable. If we don’t act boldly now, the markets will act for us very soon.”
That fact that Boehner is taking his case directly to Wall Street is significant — the Republican leader clearly wants to send a message to the markets that he’s got a strong plan for a debt limit package.
The funny thing is that the market has an odd tendency of getting the upper hand in these DC-Wall Street confrontations, whether it be a flash crash, or a sudden and "unpredictable" surge in rates, which will remind Congress just how broke this country is, and just how unsustainable the budget deficit would be if interest rates were to rise by several percent (not to mention the hundreds of billions in losses that the Fed would have to disclose courtesy of its $1.5 billion DV01.)
And while we do not expect much fireworks in the primary bond issuance market yet, it may be time to start getting concerned at 12:59pm for the next three days: if the market wishes to send a message back to Boehner, that's the time it would choose to do so.