Having reached the debt-limit three months ago, the real vinegar strokes (don’t Google it) of this political polava is just getting started as TSY Sec. Yellen launched a fearmongering missive to Congress yesterday warning that Treasury will exhaust its resources under the debt limit “by early June, and potentially as early as June 1”.
‘Be afraid, very afraid’ was the message as the House and Senate are in session for only two weeks before early June and so negotiations need to start now!
The market bought the fear with the Treasury Bill curve ‘kink’ going all the way to ’11’ after Yellen’s note…
And USA sovereign risk soaring to yet another new record high (rather dramatically higher than the prior debt-ceiling debacle periods)…
However, implied equity volatility shows little debt limit effect…
This may change once the Treasury announces a specific deadline for Congress to raise the debt limit.
However, Goldman believes that while there is a good chance that the Treasury’s cash balance will dip as low as $25-30bn for a few days in June (in the past, the debt limit deadline Treasury has given to Congress has assumed a minimum cash balance around this level), Hatzius and his pals expect Treasury to be able to pay obligations until late July…
More recently, the cash balance has rebounded sharply following the mid-April tax deadline. The large amount of April receipts and their year-to-year volatility can swing the overall deficit more than other parts of the budget. And without any meaningful trend to examine in the weeks prior to the tax deadline, there is a greater potential for surprise.
This year, we had expected April tax filing-related receipts to be down 28%, which we thought would put the deadline in early August. Over the last few weeks, April cumulative non-withheld receipts fluctuated between roughly 30% and 40% under last year’s level. Seeing this weakness, we revised our projected deadline to late July and highlighted that an early June deadline looked nearly as likely as late July. Last week, we became more confident of a July deadline when month-to-date non-withheld receipts rebounded to a decline of only 30% from last year. However, collections since then have started to lag more substantially once again.
But, the bottom-line is – blame California…
A separate issue that is harder to quantify is the impact of the delayed tax payments for most California residents. In February the IRS delayed the deadline to file and pay remaining 2022 tax liabilities from April 18 to October 16 for residents of areas affected by weather-related disasters, which includes most of California; tax payments due June 15 and September 15 are also delayed until October.
The effect is evident in daily California state tax receipts.
Even with lower taxes, the cash balance building up—along with some “extraordinary measures”—should be just enough to allow the Treasury to meet all of its obligations until early June.
At that point—late in the week of June 5, we think—the Treasury looks likely to come close to exhausting its resources, with only $25-30bn of headroom left.
By June 13, another round of non-withheld receipts should arrive ahead of the June 15 quarterly tax deadline.
If the Treasury has not run out of cash by then, these taxes should be sufficient to finance obligations until June 30, at which point the Treasury expects to get another $145bn in headroom from a set of one-time “extraordinary measures”.
The Treasury is likely to use up that additional room under the limit by late July, we think.
Goldman’s Hatzius warns that Yellen’s potentially overly-conservative projection has downsides.
Ahead of every debt limit deadline, there are some lawmakers skeptical of the deadline that the Treasury projects, presumably because they believe the estimates are overly cautious.
A June deadline might run the risk of reinforcing this perception since, as described above, there are likely only to be a few days in June where the Treasury appears to run a high risk of running short of funds.
Normally, this would not be as important a consideration since Congress would raise the limit by the announced deadline and it would never become clear whether the projected deadline was accurate or not. However, while not our base case, there is clearly a higher than usual risk that Congress fails to raise the debt limit by the projected deadline.
The risk in this scenario would be that, even if the Treasury misses a few days of scheduled payments, the cash balance would likely begin to grow just before the June 15 tax deadline and the Treasury would get more headroom June 30, as described earlier.
The risk this poses is that some lawmakers might doubt the next deadline that Treasury announced (in that scenario, probably mid/late July) since the prior deadline would appear to have taken care of itself without Congressional intervention. But missing the next deadline in July would have far more severe negative consequences. At that point, the Treasury would run a deeper deficit for a much longer period (the next round of tax payments would not be until September 15).
Finally, we note that amid all the gamesmanship in Washington over who will get the ‘blame’ should we shut down the government or actually technically default, Goldman found that historically, Republican net favorability has declined somewhat following prior debt-limit debacles…
However, it seems likely that neither party will want to take this political risk this time.
So, Goldman still believes that while it is hard to completely rule out worst-case scenarios, a prolonged stalemate seems very unlikely.
Tyler Durden
Tue, 05/02/2023 – 11:55
