In 2015, President Obama and Republican congressional leaders agreed to suspend the federal debt ceiling until March 15, 2017. After that date – less then two weeks from now – the Treasury will surpass its cumulative $20 trillion borrowing authority.
And while the stock market (and VIX) signal utter calm, signs of stress are very clear in America's money markets. Swap spreads are suggesting traders are getting nervous that any hiccup in efforts to remove the burden could trigger a shortage on short-term government securities.
And even more notably, investors are willing to pay more for bills maturing in four weeks instead of five.
That’s because they don’t want to be caught empty handed while the Treasury slows debt sales to push its cash balance lower as part of the 2015 pact to suspend the debt ceiling. The spread between the March 9 and March 16 bills may get a “a little more noticeable” as Treasury cuts issuance and provides a “clearer sense of how long bill supply is going to be lower than normal” going into the March 15 deadline, Jefferies economist Thomas Simons said in a phone interview.
So, with two weeks left until the debt ceiling suspension expires, Treasury's cash balance plummeted to $109 billion this week as of Thursday... making this the most important chart in the world right now...
Once it hits zero, as FiscalTimes notes, newly ensconced Treasury Secretary Steven Mnuchin is expected to order “emergency measures” to effectively buy more time for the government to pay its creditors and cover revenue shortfalls to keep the government operating. The stakes couldn't be higher: Failure to raise the debt ceiling would do irreversible damage to the U.S. credit rating, trigger an uproar in U.S. and global markets, drive up the future cost of borrowing, postpone Social Security payments and tax returns, and force layoffs of non-essential government workers.
Deutsche Bank points out, there was a large withdrawal of cash last week as the IRS began sending out tax refunds. Despite a change of law last year which delays the refunds for early filers, the pace of refunds are similar to previous years. Between now and March 15, the Treasury can expect roughly another $40 billion of cash drawdown from refund activities. The Treasury cut its 4-week bill auction again this week to $18 billion, which is down from $35 billion last week and $45 billion two weeks ago. It also cut the 3-month and 6-month bill auctions by $4 billion each for next week. In the near term, the driver of bill supply is still the debt ceiling. But later in the year, the Fed’s balance sheet policy will have a major influence on supply outlook. If the debt ceiling is raised by late summer, a September Fed balance sheet unwind could potentially bring a flood of supply to the market and drastically cheapen the front end.
Not everyone is ignoring the potential risks ahead, David Stockman dropped this reality bomb last week:
“I think what people are missing is this date, March 15th 2017. That’s the day that this debt ceiling holiday that Obama and Boehner put together right before the last election in October of 2015. That holiday expires. The debt ceiling will freeze in at $20 trillion. It will then be law. It will be a hard stop. The Treasury will have roughly $200 billion in cash. We are burning cash at a $75 billion a month rate. By summer, they will be out of cash.
Then we will be in the mother of all debt ceiling crises. Everything will grind to a halt. I think we will have a government shutdown. There will not be Obama Care repeal and replace. There will be no tax cut. There will be no infrastructure stimulus. There will be just one giant fiscal bloodbath over a debt ceiling that has to be increased and no one wants to vote for.”
Stockman predicts very positive price moves for gold and silver as a result of the coming budget calamity.