The Treasury Is Bending Over Backwards to Avoid Breaching the Debt Cap

(Bloomberg) -- The tightening cash situation and dwindling headroom under the US's statutory borrowing limit is forcing the Treasury to engage in fresh contortions almost daily even as legislation to suspend the debt limit progresses through Congress and market concerns ease.

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The Treasury department said Thursday that while it's " tentatively" planning to proceed with its regular auctions of three- and six-month bills next Monday, it may have to postpone them if Congress has not passed debt-cap legislation by that time. It also plans to sell a rare one-day cash management bill on Friday and auctioned a three-day instrument earlier on Thursday as it seeks to preserve its position under the borrowing ceiling.

It's also been scratching around to eke out room wherever it can using so-called extraordinary measures — basically a set of accounting gimmicks — to keep it under the limit. On Wednesday Treasury Secretary Janet Yellen's department announced it was making available an extra $1.9 billion worth of extraordinary measures via a complex debt-swap maneuver. While that's small compared to the Treasury's overall spending and borrowing tasks, or even the range of other special measures it's authorized, the emergence of this extra step underscores how close-run the whole issue of the debt cap and default could be.

The amount of cash the Treasury had in its coffers shrank to just $37.4 billion on May 30, the least since 2017, although it rebounded to around $48.5 billion the day after. The previously announced accounting measures are also being gradually exhausted.

On Capitol Hill, meanwhile, the House of Representatives passed debt-limit legislation forged by President Joe Biden and Speaker Kevin McCarthy that would impose restraints on government spending through the 2024 election and suspend the ceiling until 2025. The deal will now be deliberated upon by the Senate, where approval is virtually certain and the only question is timing. Senate Republican leader Mitch McConnell said earlier Wednesday that the measure could get a vote as soon as Thursday, days ahead of the June 5 default deadline.

From Washington to Wall Street, here's what to watch to gauge how sentiment is shifting.

The Bills Curve

Investors have historically demanded higher yields on securities that are due to be repaid shortly after the US is seen as running out of borrowing capacity. That puts a lot of focus on the yield curve for bills — the shortest-dated Treasuries. Noticeable upward distortions in particular parts of the curve tend to suggest increased concern among investors that that's the time the US might be at risk of default. That had been most prominent around early June, but yields on those maturities have eased since the Biden-McCarthy deal was announced, suggesting investors are less concerned about the threat of missed payments.

The Cash Balance

The amount that sits in the US government's checking account fluctuates daily depending on spending, tax receipts, debt repayments and the proceeds of new borrowing. If it gets too close to zero for the Treasury's comfort it could still be a problem until the legislation is passed. As of Tuesday there was just $37.4 billion left, although it got a lift of more than $11 billion on Thursday. Investors will watch each new release of that figure carefully. Focus is also on the so-called extraordinary measures that the Treasury is using to stretch out its borrowing capacity. As of the middle of last week that was down to $67 billion.

Insuring Against Default

Beyond T-bills, another key area to watch for insight on debt-ceiling risks is what happens in credit-default swaps for the US government. Those instruments act as insurance for investors in cases of non-payment. The cost to insure US debt has retreated significantly, but it remains somewhat elevated and at one point it was higher than the bonds of many emerging markets that have credit ratings well below that of the US.

Rating Companies

Hovering over the whole debt-ceiling fight, meanwhile, is the risk that the major global credit assessors might choose to change their views on the US sovereign rating. Fitch Ratings recently issued a warning that it could opt to cut the country's top credit score, a market-roiling step that Standard & Poor's took during the 2011 debt-limit fight. This time around both S&P and Moody's Investors Service have refrained from shifting their outlooks, although that is potentially a risk and investors will be clued in to anything the major rating companies might say about the situation, even if an agreement is implemented.

(Updates pricing, cash balance.)

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The Treasury Is Bending Over Backwards to Avoid Breaching the Debt Cap