"Brace" - JPMorgan Warns Debt-Ceiling Showdown Means "Non-Trivial Chance Of A Technical Default" On US Treasuries

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by Tyler Durden
Friday, Apr 21, 2023 - 05:45 PM

'Be afraid, be very afraid' - that is the message from the markets (well, every market that isn't US equities) with regard the debt-ceiling debacle in the US.

US Sovereign risk has soared to record highs in recent days, far above previous debt-related periods of crisis...

We have been warning of the imminence (and immensity) of the threat for weeks, and now even the mainstream media is starting to recognize some of the signals being flashed of just how dire the situation is for Washington (and implicitly the rest of us)...

While most remain convinced that this 'threat' remains a nothingburger (because, well, you know, they've always folded and compromised in the past), this time could be different given the political division and diametrically-opposed policy beliefs when it comes to America's debt.

Most recently, one of the main findings from JPMorgan's Investor Seminar during the 2023 IMF/World Bank Meetings was as follows:

Brace for a Congressional showdown over the debt ceiling beginning as early as May with a non-trivial risk of a technical default on US Treasuries.

Sounds ominous, and rightly so since, as we detailed yesterday, dismal tax receipts mean we are leaning towards the 'worst case' debt-ceiling X-Date scenario.

...adjusted for calendar issues and assuming that a slightly greater share of taxpayers file electronically this year (electronic payments show up more quickly, raising the hurdle for the yoy comparison), month-to-date receipts are down 31% from last year (which, incidentally, is happening at a time when the BLS is laughably, claiming that there are millions more taxpaying workers than there were a year ago this time).

JPMorgan agrees:

The debt ceiling could become an issue as early as May, with speakers assigning a 10-15% probability of the US defaulting on US Treasuries, with outlier views as high as 35%.

Both the debate over the debt ceiling and federal funding bill will likely run dangerously close to their respective final deadlines.

In the coming days, Treasury Secretary Janet Yellen will likely revise the X-date (i.e., drop dead date), which is currently early June, while the markets see it as falling between July to September.

J.P. Morgan’s US Rates Strategy team expects Treasury will run out of available resources by the middle of August.

Signs of stress typically start in the T-bill market 2-3 months before the X-date given money market funds (MMF), which are large holders of T-bills, will begin to more actively advertise that they don’t hold any bills that mature over those dates..

That 'advertising' is becoming very evident as the short-end of the T-Bill curve has massively kinked with anything within a month well bid and anything beyond about a month from now, bidless...

To put this shift in context, here is the 1m and 2m T-Bill yield (before and after an earlier X-Date threat)...

And the OIS/Bill yield spread has exploded to its highest 'since Lehman'...

Something is definitely spooking markets more than before this time... and no obvious solution, aside from compromise - which is about as useful as the other 'c-word' in Washington these days - will fix things.

While a number of proposals have been floated to avert a debt ceiling default, including the use of a discharge petition, a platinum coin and executive action via the 14th Amendment, JPMorgan notes that speakers deemed these workarounds as largely inoperable.

The politicized nature of the Congressional debt ceiling negotiations was partly blamed on the Executive branch for increasingly trying to solve problems without engaging Congress.

Speaker of the House Kevin McCarthy’s effectiveness in getting moderate Republicans to agree on a deal will be challenged given that any member could call a vote of no confidence or a motion to vacate the House speaker seat.

Finally, bear in mind that, as JPMorgan notes, in the unlikely event that the US actually does default, President Biden would then be compelled to use executive authority to lift the ceiling 3-4 days after default, but even this course of action would likely be challenged in the Supreme Court.