As the US debt ceiling crisis continues to approach, the US Treasury shrinks by $52 billion in cash in one day! Under the "coward game", investors are careful to become "wronged souls" by ignoring this risk!
Yesterday, U.S. Treasury Secretary Janet Yellen again tried to persuade Republicans to bow to Biden on the debt ceiling negotiations, reiterating that the Treasury's X day will be in early June, possibly June 1 as early as June 1.
Six years after predicting that "there will be no new financial crisis in our lifetime," Yellen said a U.S. default could lead to "a collapse in many financial markets, including global panic triggering margin calls, runs and sell-offs." It's basically the worst-case scenario.
Zero Hedge, a well-known financial blog, believes that Yellen's judgment is not wrong. The U.S. default is indeed the end [of the market], but of course it will never happen because the U.S. tax revenue is enough to pay interest and maturing debt. But, in a worst-case scenario, a bloated U.S. government and some 25 million government workers would lose their jobs, though this is long overdue.
Yellen's judgment about the timing of Day X may also be correct. As interest rate strategist Ira Jersey writes, he agrees with Yellen's assessment that "the X day of the debt ceiling could be June 1 at the earliest," although his calculations suggest that the date could be a few days later (June 5-8), as shown in the chart below:
While this put U.S. Treasury bills maturing on June 6 and 8 the focus of the debt ceiling impasse, the market did not take any risks. As the chart below shows, there is now a huge difference in yields between U.S. Treasuries due on May 30 and U.S. Treasuries maturing on June 1, indicating that the market now believes that June 1 is indeed X-day.
Unfortunately, the bill market may be too optimistic. Today's latest data showed that the U.S. Treasury's cash shrank sharply by $52 billion, from $140 billion to $87 billion, bringing TGA's cash back to pre-tax season levels.
(Note: When U.S. government spending reaches the statutory debt ceiling, authorities can only use existing cash balances in the Treasury Department's General Account (TGA) to fund day-to-day spending.) The TGA is managed by the New York Fed, and tax revenues and proceeds from the sale of Treasuries go to the TGA. ）
Joseph Abate, a barclays rate strategist, believes the U.S. Treasury may run out of cash and special measures capabilities under statutory borrowing limits between June 4 and 12. As the chart below shows, Barclays strategists expect Treasury funds, including remaining borrowing capacity (about $230 billion as of May 12), to fall below $30 billion as early as June 4 and $10 billion as early as June 12.
Abate wrote in his monthly report:
"The Treasury was able to add some special measures in May, and after June 30, the Treasury will have access to another $140 billion in special measures capacity. But it may not have enough money to survive the June 15 corporate tax day. ”
Two other banks agree. Deutsche Bank strategists believe that X-day is basically in early June, and the end of July is just an optimistic vision; JPMorgan analyst Jay Barry also concluded that the Treasury would exhaust all available resources by June 7, slightly earlier than their previous estimate of June 9. However, they consider the risk of an X-day in early June to be "significant" because large payments for Social Security and Medicare are due in the first two days of June.
In short, the market is now behaving as if June 1 is X day, and there is some uncertainty about the daily demand for cash, which may delay X day by a few days, at most a week, but not for longer.
While the math is fairly straightforward, with both sides playing the "coward game," the likelihood of political error this time is much higher than in previous deadlocks, and the market has largely ignored this and therefore the risk of government default.
Finally, while the Treasury has made no secret of its reluctance to prioritize any payments, and it claims it has no plans to do so, foreign media estimates that even in a pinch, when the issue is not resolved, if the government immediately cuts total spending by 25% from June 1, the US Treasury will maintain a surplus until the March 2024 tax refund.
This means that the crisis will be lifted. The question is whether it is necessary to pay billions a day for 25 million bureaucrats and bloated governments.