The Debt Ceiling Is The Least Of Worries For T-Bills

Sometimes it feels as if no one in DC knows what they are doing.
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Wall Street’s fear gauge is blinking red, in part because it’s dawned on investors that a massive, debt-financed tax cut isn’t exactly a great prescription for an economy already growing above its potential.

But misguided tax policy is nothing compared to the possibility that Washington will mishandle the upcoming deadline for raising the U.S. debt limit, which the Congressional Budget Office estimates could be breached during the first week of March. Bond traders are taking note of the date, as 4-week T-bills—set to mature the week of the deadline—priced 8 basis points above the same bills maturing a week prior.

This auction represents a continuation of a trend that began last year, according to Deutsche Bank’s Torsten Slok. “Investors are becoming more skittish about the debt ceiling,” he says. “The fact that this is coming back again, combined with the political climate at the moment, has more investors worried about the debt ceiling and the process of raising the debt ceiling.”

At first blush, it would seem that the “political climate” today would be more hospitable to a drama-free raising of the debt ceiling than in years past, seeing as there is one-party control in Washington, and there would be nobody to blame but the GOP for the U.S. Treasury defaulting on its obligations.

But a significant fraction of House Republicans believe that breaching the debt ceiling is a non-issue, because tax receipts are enough to pay holders of federal debt, even if the Treasury were forced to stiff payments to federal workers, Medicare recipients, or other beneficiaries of federal spending. Indeed the House of Representatives voted to just that in 2013, the last time the government seriously flirted with a debt-ceiling breach. While such a strategy would theoretically mean that bondholders would get their money back next month, the willingness to default on any obligations whatsoever surely can’t induce investor confidence.

Lawmakers in the Senate have a firmer grip on reality, and Axios reports Wednesday morning that Chuck Schumer and Mitch McConnell are close to a deal to raise the debt limit, but whether their agreement will meet the standards of House Republicans remains to be seen. Conservative members of the GOP caucus have reportedly been offended by Administration appeals to support a debt ceiling increase, and have been demanding concessions in exchange for a ceiling hike that would be non-starters for Democratic senators, like submitting mandatory social spending programs to an annual appropriations process.

There’s no way of knowing just yet how far apart the Senate and House conservatives are on this issue, or how close to a debt-ceiling breach either side is willing to take the country. Seen in this light, it makes total sense that T-bill markets are increasingly disturbed by the impending debt limit. But taken from another view, an 8-basis point spread is somewhat absurd, given the havoc any sort of U.S. government default would have on markets. David Enna, who runs the Treasury-security blog Tipswatch, emails to say that worrying about the effect of a debt-ceiling breach on 4-week T-bills is putting the cart well before the horse. “If the Treasury defaults, there are going to be a lot of worse problems, all over the economy,” he writes. This is most certainly true, but given the growing taste for political extremism and brinkmanship in Washington, it would be wise for investors to consider that Congress doesn’t understand the severity of the situation.

Christopher Matthews is a writer who splits his time between New York City and Accra, Ghana, with an interest in the intersection of markets, the economy, and public policy. He previously held staff positions at Axios, Fortune Magazine, and Time Magazine, and has been published in Forbes and Debtwire.

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