The T-Bill Market Is Beginning To Brace For The "Hard" March Debt Ceiling

The last few days have seen a great rotation in T-Bill markets. That rotation, as the chart below shows, has seen short-dated Bills rally as the new "deal" became closer and closer but the mid-term Bills start to crack higher in yield.

T-Bill yield change from last week as deal rumors began... the risk is now in the market and won't escape until the can is kicked infinitely far away - until then it will sloosh along the maturities as we approach the deadlines...

 

Based on press reports, the short-term debt ceiling extension expected to be passed by Congress would suspend the debt ceiling until February 7.

However, as Citi notes,

Feb. 7 would only be a "soft" deadline since Treasury would then be able to engage in "extraordinary measures" to open up "headroom" under the debt ceiling.

 

These measures may be worth around $200 billion of additional debt capacity. Based on a rough estimate, described below, we think the new "hard" debt-ceiling deadline, when Treasury is at risk of being unable to pay all its obligations, is likely to be in March 2014.

 

We base our rough estimate on the historical experience in 2013. Starting Feb. 7, 2013, Treasury ran a $144 billion cumulative deficit through Feb 28, 2013 and $270 billion cumulative deficit through April 1. Roughly speaking, if cash-flows in 2014 are similar to 2013, this would put the "hard" ceiling date under the proposed plan in March 2014.

 


The problem - introduced into the market by this most recent debacle - is that until the can stops being kicked (or is kicked infinitely), the politicians have made hundreds of billions of dollars in T-Bills "haircuttable" - i.e. not 100% money equivalent... and that naturally reduces the velocity of the collateral and rehypothecation, acting as a drag on risk (though we are sure the Fed will do its best to fill the broken "market" void)