Two days ago we observed that while stocks remain convinced that the upcoming debt ceiling fiasco will go away on its own, the bond market is far less sanguine, as shown by the historic colapse in bids for the latest 4-week Bill auction.
Overnight Goldman released another note, in which it also warned that the "clock is ticking" even if it spun it as optimistically as possible:
- With less than two weeks to go before the Treasury’s projected deadline to raise the debt limit, the outlook for dealing with the issue has finally begun to get a little clearer. The House looks likely to act early next week, with a Senate vote following late next week or over the weekend. If Congress holds to this timetable, it suggests a debt limit increase will be signed into law by the November 3 deadline, though probably with little time to spare.
- So far, financial markets appear mostly unfazed by the uncertainty. That said, over the last couple of days some signs of modest unease with the situation in Washington have appeared. Most notably, the yields on Treasury bills that mature around the debt limit deadline have risen, even while yields on securities maturing later in the year have not.
- Overall, our sense is that while there is a good deal of uncertainty regarding the outlook for the debt limit, the issue is likely to pose less of a perceived risk than the prior debates in 2011 and 2013. So while there are some signs of nervousness in the market related to the debt limit, it seems unlikely that the issue will be quite as disruptive as it was in previous years.
However, moments ago the US Treasury promptly removed any latent optimism that this latest debt ceiling crisis will somehow be magically fixed on its own after it announced that it would postpone the two-year note auction previously scheduled for Tuesday, as the impasse over the debt limit constrains the nation’s borrowing.
“Due to debt ceiling constraints, there is a risk that Treasury would not be able to settle the two-year note” on Nov. 2, the Treasury said Thursday in an e-mailed statement as reported by Bloomberg.
Curiously, the five-year note auction, scheduled to take place on Oct. 28, and the seven-year note auction, scheduled to take place on Oct. 29, will proceed as planned, at least for now. Both sales will settle on Nov. 2, the department said.
U.S. Treasury Secretary Jacob J. Lew on Wednesday reiterated that the government on Nov. 3 will exhaust the tools it’s using to stay under the cap. He urged Congress to act now to increase the U.S. debt limit, calling it irresponsible for lawmakers to use political brinkmanship that could jeopardize the government’s record of honoring its obligations.
Finally, recall that the House is expected as early as Friday to vote on a conservative debt-limit proposal even though chances are slim that the plan can pass the Senate. Speaker John Boehner (R-Ohio) told the GOP Conference on Wednesday that he is expecting a vote on the Republican Study Committee (RSC) plan that would raise the debt limit to $19.6 trillion from $18.1 trillion and would run through March 2017.
Which, incidnetally is precisely how this latest theater will end: with the US getting its Treasury limit boosted to just shy of $20 trillion, buying the US government enough time until early 2017 when the farce repeats again.