Credit-default swap prices may already be quivering, but we were hoping for another few months before we’d have to start properly worrying about the US debt ceiling.
No such luck. From Goldman Sachs just now:
■ While the data are still very preliminary, weak tax collections so far in April suggest an increased probability that the debt limit deadline will be reached in the first half of June. We have been projecting that Treasury could operate without a debt limit increase until early August.
■ At this point we see a slightly greater chance that the deadline is in late July, but this could easily change to a base case of early June if tax receipts continue to undershoot. The probability of the deadline falling between these dates is much lower, as a mid-June tax deadline will create some room under the limit and additional “extraordinary measures” become available on June 30.
■ A June deadline would raise the possibility of a short-term extension. We are generally skeptical of reports that congressional Republicans might pass a short-term debt limit extension, as voting to raise the debt limit twice is harder than voting once. That said, if the Treasury announces in May that the deadline is only a few weeks away, there would be little time to negotiate a deal and a short-term extension could provide a way out. While not our base case, a June deadline would make a short-term extension a plausible scenario.
■ So far, financial markets do not appear to reflect debt limit risks with the exception of sovereign CDS spreads, which have widened considerably. As the debt limit deadline comes into better focus with additional tax receipt data, we expect to see somewhat greater pricing of debt limit risks in financial markets. That said, the possibility of a short-term extension—particularly if the deadline falls in early June—might reduce the degree to which market participants engage on the issue.
Goldman Sachs’ Jan Hatzius says we’ll know a bit more when more tax payment data is released later this month. He notes that the data available so far is only through April 14, which normally makes up 15 to 17 per cent of total non-withheld filing season tax receipts.
But the tl;dr is that the debt ceiling drop-dead has probably moved forward to late July, but there’s now a chance that it arrives in early June, as the mid-month tax payments fizzle and fail to create a bit of extra breathing room. Here’s what that looks like in chart form:
FTAV sympathises with Anna Gelpern’s primal scream about the “inane, moronic, irrational, exploding human appendix ****show that is the debt ceiling”. To that we’ll add that the Republicans still trying to get something out of this — after so many embarrassing showdowns under Obama and that Trump presidency — is an excellent example of political pigheadedness over, well, basic reason.
Anyway… Barclays’ Ajay Rajadhyaksha has previously written here on Alphaville that the debt ceiling really shouldn’t be that scary. The White House will clearly prioritise debt payments so there won’t be a sovereign debt default (barring any mishaps), and the short-term economic impact of the US government suddenly slashing spending might not be as bad as many think.
The market, however, doesn’t seem entirely reassured:
Read the full article here