With everyone's attention turning to the debt ceiling X-Date of October 17 (or sooner now that the Pentagon is once again spending money like a drunken sailor following the recall of 400,000 workers or half of the total number fuloughed), some are wondering why is the stock market not reacting more violently. The generic response that has formed is that despite all the feamongering by Obama and the Treasury, even crossing the X-Date will hardly result in the apocalyptic outcome that so many predict as the Treasury can "prioritze payments", i.e., paying some bills and not others, which as we explained before [6], means paying down debt obligations first, and everything else - whose non-payment does not constitute an event of default under US debt - last. In other words, if the US were to merely live within its means, it should have no problem remaining current on its interest expense even if that means slashing most other government programs.
While superficially this is correct, there is one issue that few are discussing, namely the mountain of short-term debt maturities between October 24 and November 15, which if unable to be rolled over - something that would hardly be able to happen in a time of quasi-technical default - would imply redemption and maturity of the debt without a subsequent rolling over.
The chart below lay outs the amount of Bill, Note and Bond maturities between October 18 and November 15: it totals a whopping $441 billion.
[7]
As the Bipartisan Policy Council assessed, correctly, before, the Treasury must roll over well over $370 bn (make that $441 billion per latest calculations) in debt that will mature this year during the Oct 18 – Nov 15 period.
- When a Treasury security matures, Treasury must pay back the principal plus interest due. Under normal circumstances, Treasury would simply “roll over” the security.
- As one security matures, the principal and interest for that security would be paid for with cash from the issuance of a new security.
In a post-X Date environment, this operation may not run as smoothly.
Two elements of market risk:
- Treasury will have to pay higher interest rates to attract new buyers.
- It is possible, if unlikely, that not enough bidders would appear, forcing Treasury to either use cash on hand to pay off securities that came due or, in a worst-case scenario default on the debt.
Actually, it is very much likely that if there is fear that one or more short-term funding acutions will not result in a prompt repayment, it is virtually assured that the Treasury will simply halt new Bill issuance to avoid the panic that would result from ultra-short term rates soaring and destroying the Fed's carefully crafted ZIRP (on the short-end) policy.
And according to our and the BPC's preliminary calculations, just focusing on simply paying down this debt in the all too likely case that the rollover machinery grinds to a halt, means that the Treasury would be about $180 billion short of paying down just the amounts due in the table above!
So sadly, no. Those who are trying to talk down the severity of even a quasi-technical default, in an attempt to explain why the algos are oblivious to what may happen in ten short days, they have it all wrong. Instead the only logic for the lack of a selloff, is that once again, everyone and the kitchen sink, is 100% certain that should a worst case scenario transpire, it will be the "Mr. Chairman" who once again "gets to work," and makes sure that nobody suffers any loss. After all, the New Normal is all about return; nothing about risk.