Are Markets Sleepwalking Into A Debt Ceiling Crisis: Mnuchin Issues Another Warning

Tyler Durden's picture

Over the weekend, Morgan Stanley reminded its clients that perhaps the biggest threat facing markets over the coming weeks is the “three-headed policy monster” inside Washington: raising the debt ceiling, passing a budget and embarking on tax reform. As MS cross-asset strategist Andrew Sheets noted, "none are easy, but we see the debt ceiling as the most immediate test."

He then cautioned that while the most likely outcome is that, after some tension, the debt ceiling gets raised "we don’t think it will be easy, or smooth, and it may require some form of market pressure to get different sides to fall in line. I’ve spoken to investors who are comforted by FOMC transcripts from 2011 that discussed prioritization of debt payments in order to avoid default. I am not. First, I worry that this reduces the urgency of what remains a serious issue. Second, this prioritization would require delaying payments to programmes like Social Security and Medicare, with real human and economic cost. And third, while the mechanics of this prioritisation may work, it is untested in a live environment."

Perhaps sensing that the market is getting increasingly concerned about the potential standoff over the debt ceiling debate, which could eventually lead to a technical default, moments ago Treasury Secretary Steven Mnuchin, speaking at an event in Louisville, said that "we need to raise the debt limit and it’s my strong preference is that there’s a clean raise of the debt limit."

While Mnuchin conceded that he is "all for spending controls” and Congress has the “absolute right and the absolute obligation” to oversee spending, the Treasury secretary issued another stark warning that "he’ll run out of authority by end-Sept. to stay under the debt ceiling." Said otherwise, Congress will have just days to reach a compromise on the debt ceiling when it returns from recess.

Assuming that Mnuchin is correct, and that the D(ebt)-Day actually falls in September, that would mean that the T-Bill kink noted previously will shift forward, most likely to the last week of September.

Potentially complicating matters is that as Morgan Stanley observed, the fact that "debt prioritization" remains an explicit option laid out by the Fed in 2011, may be just the reason why Congress will take its time, assuming that there is a loophole to a last minute deal as neither side rushes to comrpomise, which in turn could lead to the dreaded outcome, however short it may be.

Mnuchin also added redundantly that "we can’t put the credit of the United States on the line” as reserve currency of world and major economy." This is a continuation of what Morgan Stanley said: "the idea that America’s creditworthiness is beyond reproach is, without exaggeration, the cornerstone of the global fixed income market. We hope that politicians appreciate the seriousness of this issue and put politics aside to resolve it. History is watching."

History may be watching, but most markets so far are not?

Recall that when it comes to discounting any potential complications over the coming debt ceiling showdown, US T-Bills have been well ahead of the broader "Wall of Worry", as shown both above and in the charts below.

Indeed, the dislocation in front-end rates deemed “at risk” given the likely timing of any missed or delayed payment should persist right up until there is a resolution, with the pricing of risk becoming more pronounced the longer there is inaction. But when will remaining asset classes follow and start selling off on fears that an 11th hour solution won't be reached?

Judging by historical examples, "it is not unusual for equity markets to be comparatively sanguine until it is within the month of the deadline", according to Deutsche Bank.

In 2011, the VIX oscillated somewhat in the months ahead (with modest rises at a roughly similar lead to the debt ceiling deadline as the current rise in vol), but the meaningful move higher did not come until about a week prior to the eventual resolution. In 2013 (when the debt ceiling deadline coincided with a government shutdown), the larger pop in equity vol occurred about three weeks before, peaking about a week prior to the resolution. It has not been uncommon to see some degree of equity drawdown about two months ahead of the debt ceiling deadline, with another more muted sell-off arising alongside with the aforementioned rise in volatility, though through this lens the evidence is perhaps somewhat less conclusive.

In other words, while the market has shown remarkable complacency so far and stayed stoically sanguine about the late September debt ceiling fireworks, this may change very soon. Deutsche Bank's conclusion:

September presents itself as a possibly pivotal month during which Congress must pass a new budget and raise the debt ceiling and the Fed may still yet press ahead and announce the start balance sheet normalization. It would seem that if the Fed declines to acknowledge the possibility that more pervasive inflation weakness may warrant a pause, and political gridlock persists, dragging negotiations to the brink, the type of self-reinforcing vol spike and risk-off may not be far off.

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lester1's picture

Debt ceiling crisis, or any other crisis be damned. The Federal Reserve will continue buying stocks covertly to keep the assets of the wealthy propped up!


Stop by 33 Liberty Street NYC  and say thanks to the NY Fed keeping Markets propped up.

Edward Morbius's picture

Why is it called a "debt ceiling" if it has never, ever held back increases in debt? Wouldn't "debt floor" be more appropriate?

BullyBearish's picture

more like a "debt extravaganza"...


when you are in control of everything and your weapon for control is DEBT, of course they you want MORE of it...

seabass974's picture

But the Dow is off its ATH by a few hundred points .. this is what happens when you outsource to the SNB and the JCB .. someone needs to kick some ass get those fingers pulled out and put the Dow back to its ATH.  F** Muppets.

mike_king's picture

Trump should ignore cuckservatives and shut down the fedgov and fire the Deep State.

SimmerDown's picture

Yawn. Yellowstone is more likely to erupt this year than congress not increasing the debt ceiling.'s picture

Will the S&P tank during the eclipse or will the algos be able to "keep the show on the road"?  We shall see.  Wish I manufactured a few million Chinese eclipse glasses last December.

hxc's picture

Sure, but wouldn't that require being Chinese? Lol.

agstacks's picture

Democrats will get everything they want and republicans will claim a win by keeping the government open. The end. 

besnook's picture

this is such bs. there is no advantage to anyone in congress to not raise the debt ceiling. we will get the usual grandstanding about the debt and platitudes about reponsible fiscal policy. there will be party blaming and few guys who game the event by voting against a rise in the ceiling. however, the debt ceiling will be raised because western civilization depends upon it. there will not be any banksters begging for a bailout.

Ben A Drill's picture

Mitch McConnell: 'Zero chance' US fails to raise the debt ceiling. CNBC News.

Edward Morbius's picture

Why even have it, then? Just get rid of it and let the spending go unchecked... hey, it never HAS been checked yet, has it?

Ben A Drill's picture

Go ask Mitch McConnell not me.

Why do I still work? Because my wife says so. LOL!

shizzledizzle's picture

And perhaps the only time he can be trusted to follow through on his word. 

wmbz's picture

This Muchkin guy needs to find something else to worry about. The debt ceiling is not one of them.

It only goes one way...UP!

hxc's picture

Mnuchin is actually a good guy (unlike Cohn) and has already experimented with running the Treasury all the way down to $0. I think Trump may use a debt default to restructure what we owe, and to whom.

Rand's (really Ron's) bill's passage would assist in that effort greatly

Herdee's picture

There's well over $100 Trillion of unfunded liabilities going forward with no plan to pay for any of it. Those are so-called obligations like military pensions etc.

ExtraordinaryIrrelevance's picture

Let's just raise the debt ceiling to 100 Trillion. Next Problem?

karenm's picture

Warning by a bona fide. 

Nothing will happen

DEMIZEN's picture

nonsense. keep buying

lester1's picture

Up> Trump gets funding for the wall

Down>Trump fails to fund the wall

Son of Captain Nemo's picture

"... it is not unusual for equity markets to be comparatively sanguine until it is within the month of the deadline."

Inside Steve Mnuchin's fucked up skull. ...


order66's picture

Bannon's gone. Clean debt ceiling hike a done deal. Trump's agenda DOA also a done deal.

Son of Captain Nemo's picture

"Bannon's gone. Clean debt ceiling hike a done deal. Trump's agenda DOA also a done deal."

It's a winner!

We just need for our looting operation(s) to go better in places other than this ( and we should be "A-OK"!!!


two hoots's picture

Raise the debt guillotine higher.


DC Beastie Boy's picture

Debt ceiling?  HAHAHHAHA

U4 eee aaa's picture

They couldn't get any closer to beating a dead horse than if they brought a dead horse to the White house and beat it

geno-econ's picture

Debt Ceiling Debt Crisis is so passe.  Has anybody noticed we had a  Silent Greek Style Military Coup in the White House ?

Ban KKiller's picture

Mnuchin, how's that lunch? Does your new bride know about your new girlfriend, the boy cunt?

Roth-a-feller's picture



But David Stockman says so ...



Silver Willie's picture

The big question is not if the ceiling will be raised but by how much.  How high will they raise the roof on this party?

Rebelrebel7's picture

It is really a shame that the entire government and federal reserve are intent on destroying America! It is treason, and we are helpess.

turkey george palmer's picture

Sounds scary. We need a distraction. Cause people just can't be allowed to hear what's going on. It's almost tempting to say I hope it goes full retard, maybe ole maverick mcpain will do something stupid or Bernie might say the wrong thing.

 Somebody better throw up on all this and scare the banks a little

Phillyguy's picture

The US economy is a house of cards dependent upon ever increasing debt.


surf@jm's picture

How short memory is.......

The repubs passed all the pork barrel spending last time with DEM majorities......

It will happen this time also.....

casapi's picture

let it happen its a good thing, its sad to keep taking debt and monetizing it too,    NO free lunches gob wankers