US: Debt limit to strike by mid-to-late October - Nordea ...

28 September 2021

          US: Debt limit to strike
          by mid-to-late October
Sara Simone Strøm | Andreas Steno Larsen

The annual debt ceiling soap opera is back! When will the US Treasury be
short on cash to pay bills? We expect the x-date to occur already in October
eectively forcing the soap opera to end. A stop-gap funding bill is needed
already this week.
The US government will likely face a default on its debt obligations between mid-October and mid-November
unless the debt ceiling is raised or suspended according to the Washington think tank Bipartisan Policy
Center, why the political soap opera surrounding the debt ceiling will have to end soon to avoid a political
disaster.

Chart 1. When is the X date? Latest update from Bipartisan Policy Center

corporate.nordea.com/article/67886/us-debt-limit-to-strike-by-mid-to-late-october

Recently, the Treasury Secretary Janet Yellen also warned that the debt ceiling must be raised or suspended
by sometime in October or the US government will be unable to pay its bills.

The debt limit has been particularly unpredictable this year. Beyond the federal spending and revenue
volatility, cashflows related to COVID-19 relief eorts and the pace of economic recovery means that the
uncertainty has been even greater. Looking at mobility trends for Transit Stations, Grocery & Pharmacy and
Retain & Recreation, activity is slightly falling indicating reduced revenues compared to the central scenario
from the Bipartisan Policy Center – we judge that a x-date around the middle of October now seems likely.

corporate.nordea.com/article/67886/us-debt-limit-to-strike-by-mid-to-late-october

Chart 2. Activity seems to be sliding slightly since the most recent x-date update from the
Bipartisan Policy Center

The Treasury Department is using “extraordinary measures” to keep the government functioning and from
hitting the debt limit, which was reinstated on Aug. 1. As the US Treasury continues to spend these resources
over the coming weeks, the department will soon have dangerously few reserves to fund the government’s
obligations. Once the Treasury Department exhausts these resources, payments on Social Security, Medicare,
military spending, interest on U.S. debt and other payments would come due in the following days.

Financial markets are already “concerned” judging by the rising yields on short-term Treasury bills from mid-
October. In previous years, uncertainty has caused interest rates on some Treasury bills to spike in anticipation
of reaching the debt limit. The market seems to price in a x-date around the middle of October judging from
the T-bill curve.

corporate.nordea.com/article/67886/us-debt-limit-to-strike-by-mid-to-late-october

Chart 3. Ask yield on T-bills curve hinting of a x-date already in mid October

Bipartisan approach to debt suspension?
Government funding is set to expire on Sep. 30 due to the financial year ending, but Tuesday Sep 21.
Democrats in the House of Representatives passed a bill that will suspend the U.S. debt ceiling until after
New Year’s and keep the government open through Dec. 3. The bill now faces an uphill battle in the Senate.
Republicans have refused to vote for a short-term funding bill that deals with raising the debt ceiling.
Republican Leader Mitch McConnell has explained that Republicans oppose raising the debt ceiling because
it would pave the way for Democrats to pass the $3.5 trillion human infrastructure bill, that would undo much
of former President Trump’s 2017 tax cut.

However, by combining the debt limit suspension and the funding bill, Democrats are basically daring
Republicans to vote no and cause a shutdown. Without agreeing on a stop-gap funding bill THIS week, the
government will hence have to shut down already Sep. 30, even despite the US Treasury still being able to run
on fumes another few weeks without a debt ceiling suspension.

Republicans have said Democrats could raise the debt limit through reconciliation, a procedure that allows
bills to pass with a simple majority in the Senate instead of 60 of the chamber's 100 members. Democrats
have resisted doing that so far, saying the vote to raise the debt limit should be a bipartisan one – and it
is debatable whether senators such as “Blocking Joe Manchin” from West Virginia will accept using the
reconciliation process. Manchin for example backed the Trump tax cuts in 2017.

corporate.nordea.com/article/67886/us-debt-limit-to-strike-by-mid-to-late-october

If Democrats apply the reconciliation procedure they would need to raise the debt limit by a certain dollar
amount instead of a calendar-based suspension. Democrats are avoiding this as it would put responsibility
solely on Democrats to pass the increase, and it could risk reopening the debate on the $3.5 trillion human
infrastructure bill, that is already meeting resistance among some Democrats.

If Republicans do not change their position at the last minute, it seems very likely that Democrats must
compromise on parts of their infrastructure package. This will aect the federal deficit which in Joe Bidens
initial budget plan will be hitting $1.8 trillion in 2022 before tapering o. We pencil in an expected deficit of
$1.3-1.4 trillion in 2022 after a political compromise forced by the x-date hitting in October.

Stronger dollar in sight
Once the debt ceiling suspension occurs a USD 700bn mountain of net issuance between late October and
New Year’s will be seen when the US Treasury is allowed to increase the debt burden again, which will take
the issuance to QE ratios back to Q1 2021 levels, leaving a clear risk of 1) a stronger USD, 2) a tighter (more
negative) OIS/OIS xCcy basis in EURUSD and 3) higher USD rates into the year-end.

Chart 4. The issuance to QE ratio will increase markedly once debt ceiling is suspended
again

corporate.nordea.com/article/67886/us-debt-limit-to-strike-by-mid-to-late-october

Sara Simone Strøm                   Andreas Steno Larsen
Analyst                             Chief Global FX/FI Strategist
sara.simone.strom@nordea.com        andreas.steno.larsen@nordea.com
                                    +45 55 46 72 29

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