Once again, straight out of Morgan Stanley's rate deks (or what's left of it after the whole TIPS implosion).
Treasury officials held a 12 pm meeting today with all 20 primary dealers to discuss market developments and financing options. They did not want to discuss specific contingencies related to the debt ceiling but did want to outline a course of action aimed at preserving access to the markets.
First, Monday’s bill auction will be held as scheduled. Second, if there is a debt ceiling hike enacted before Wednesday’s 9am refunding announcement, the announcement, WI trading, and auctions will proceed as usual.
However, if there is no debt ceiling extension, three possible options were discussed:
1) Delay the August refunding and issue a short-dated cash management bill as a substitute. The bill could be rolled, as needed. The coupon auctions would be rescheduled when the debt ceiling was hiked.
2) Hold auctions as scheduled but at much smaller sizes using up only the available borrowing authority created by the maturing issues. There are $24 bil of securities maturing on the 15th. Dealers were concerned that you would have illiquid issues and playing catch up once the debt ceiling was raised, which would cause bigger problems.
3) Announce a conditional refunding with WI trading. The auctions would occur as soon as the debt ceiling was hiked. Dealers argued that this was not a viable option either because markets would be unable to price the securities given the timing uncertainty.
Also, one dealer suggested auctioning a full size 10-year security, delaying the 3-year until the end of the month and blending in the 30-year to subsequent cycles
Treasury indicated that dealers need to be prepared for the possibility that auctions (even coupon auctions) will be announced, auctioned and settled on the same day (although Treasury agreed that a 24 to 48 hour period of WI trading would be preferable).
There was significant amount of discussion surrounding money markets conditions (particularly, CP) but policymakers did not provide any hints regarding if and how they might respond.
Dealers suggested that the Treasury might be able to repo their MBS portfolio to raise cash. However, Treasury officials did not offer any comment on this possibility.