1、Please refer to important information and HYPERLINK mailto:danielle.catananzi Please refer to important information and HYPERLINK mailto:danielle.catananzi MAR disclosures at the end of this reportFOCUS | US20 February 2019KEY MESSAGESCongress last suspended the debt ceiling in February 2018. With t

2、he current suspension period set to expire on 1 March, Congress will have to pass legislation to suspend it again.Until it does, the Treasury will have to resort to extraordinary measures and its cash balance to meet obligations, actions whichKEY MESSAGESCongress last suspended the debt ceiling in F

3、ebruary 2018. With the current suspension period set to expire on 1 March, Congress will have to pass legislation to suspend it again.Until it does, the Treasury will have to resort to extraordinary measures and its cash balance to meet obligations, actions whichare expected to last until around Q3.

4、 The Treasury could prioritize payments thereafter.We do not see House Democrats engaging in the same brinksmanship as House Republicans in 2011 and 2013 though. That said, we think they will still use the debt ceiling as a lever for spending priorities, making a “clean pass” unlikely.Congress be ef

5、fectively forced to take action on budget caps by the of September. Such negotiations have often vehicles to suspend the debt ceiling, and we see the FY20 budget as the same, implying a Septemberresolution.In this report we illustrate the typical phases of debt ceiling showdowns on the rates markets

6、 beginning with (i) The Treasury running down cash and lower T-bill supply into and during the period (liquidity injection); (ii) T-bills cheapening close to X-dates (if we get there); and (iii) The Treasury rebuilding its cash balance with increased T-bill issuance (liquidity drainage).Debt ceiling

7、 reinstatement, tightening of 90 day financial CP spreads and banks CDS of Libor contributors all suggest 3m Libor/OIS spread can tighten by at least 10bp by June.MARKET VIEWDebt ceiling reinstatement periods are associated with increased liquidity and tighter Libor/OIS spreads as the Treasury reduc

8、es T-bill issuance and its cash holdings, boosting bank reserves. Whilst this reverses with a resolution (new suspension), typical drivers of 3m Libor/OIS such as banks CDS of Libor contributors and GSIBs and 90day financial CP spread find Libor/OIS is it is at least 10bp too wide. We target 3m Libo

9、r/OIS at 15bp by June.Fig. 1: Recent debtceiling historyFig. 2: Sticky 3m Libor/OIS should tighten furtherMARKET VIEWDebt ceiling reinstatement periods are associated with increased liquidity and tighter Libor/OIS spreads as the Treasury reduces T-bill issuance and its cash holdings, boosting bank r

10、eserves. Whilst this reverses with a resolution (new suspension), typical drivers of 3m Libor/OIS such as banks CDS of Libor contributors and GSIBs and 90day financial CP spread find Libor/OIS is it is at least 10bp too wide. We target 3m Libor/OIS at 15bp by June.Sources: US Treasury, CRS, Macrobon

11、d,BNP ParibasSources: Bloomberg, ICE, BNPParibasShahid Ladha , Head of Strategy for G10 Rates Americas | BNP Paribas Securities HYPERLINK mailto:andrew.schneider Andrew Schneider, Economist, US | New York, BNP as Securities Corp| FOCUS20/02/20191 HYPERLINK / | G10 INTEREST RATES HYPERLINK / | G10 IN

12、TEREST RATESThe debt ceiling a recap: The federal governments constitutional power over taxes, spending and borrowing resides in Congress. As part of this power, Congress legislated a debt ceiling in 1917, which it has periodically lifted or suspended ever since.The debt ceiling applies to 99.5% of

13、all federal debt, held both by the public and intra-governmentally. The federal government is prohibited from incurring aggregate debt beyond the debt ceiling.Once reached, since the federal government runs budget deficits, the Treasury must use extraordinary measures suspending or downsizing debt i

14、ssuance and withholding revenues that would normally be transferred to government trust funds and its cash balance to meet its obligations.These measures only last so long, however. If the debt ceiling is not lifted or suspended, the Treasury would ultimately be faced with prioritizing payments betw

15、een marketable debt, entitlement payments and funding government agencies.Debt ceiling the politics: Since 2011, House Republicans have periodically used the debt ceiling as a lever for spending cuts, refusing to support a lift or suspension until fiscal demands were met.The 2011 episode and the 201

16、3 episode that followed it saw House Republicans withhold suspension until near the end of the Treasurys estimated ability to use extraordinary measures.A powerful negotiating tool: The debt ceiling remains a powerful lever for negotiating spending priorities. Since 2013 Congress has suspended it on

17、 five occasions with progressively less brinksmanship, although it has continued to allow the Treasury to revert to using extraordinary measures for multiple months (Figure 3).Current state of The composition government is a mirror image of the period of debt ceilingbrinksmanship Democrats now contr

18、ol the House Republicans theSenate and presidency.Unlike previous episodes, in addition to the president wanting to avoid a protracted debt ceiling fight, both House and Senate leadership have expressed a similar desire. That said, we do not expect House Democrats to completely give away the leverag

19、e that comes with the debt ceiling, especially with FY20 budget negotiations on the horizon.Specifically, Congress will need to lift caps set to cut discretionary spending by USD126bn (technically, it can manage to do so in January as the enforcement mechanism for the caps sequestration does not com

20、e into effect in until then).The Treasury will likely head into the use of extraordinary measures with a higher cash balance than previous episodes around USD200bn.The Bipartisan Policy Institute estimates that the Treasurys use of extraordinary measures and the cash balance will allow it to meet it

21、s obligations until at least mid-summer. Given the effect of the Tax Cuts and Jobs Act on government receipts and April tax refunds though, there is considerable uncertainty around this estimate.September suspension: We expect the negotiations to lift the FY20 caps to be fraught, with House Democrat

22、s likely to push for lifts to non-defense discretionary spending, which the president and Senate Republicans will likely oppose (the presidents expected FY20 budget resolution reportedly proposes 5% spending cuts across- the-board).Still, such negotiations and subsequent legislation have historicall

23、y served as vehicles for debt ceiling suspensions, and we expect them to do the same this time around.We think the Democrats will likely use the debt ceiling to win some priorities on a budget deal, and vote for a suspension along with a continuing resolution or bipartisan budget deal in September.I

24、f debt ceiling negotiations do push close to the X-date (the estimated date of Treasury default), we think Senate Majority Leader McConnell could move to put a “clean” debt ceiling suspension on the Senate floor for a vote or attach it to a non-controversial bill. With the x-date approaching, we thi

25、nk both the House and Senate would ultimately pass such a bill and move on.Fig. 3: Recent debt ceiling episodesLength of DateLength of DateDateofextraordinary ceiling hit resolution measuresuse(days)Once resolved,lengthofResolution resolution(months)Lift or suspension5/16/20118/2/20117817BBA12/31/20

26、12 2/4/2013353NoBudget,NoPay Suspension 5/18/2013 10/17/20131524CR2/8/20142/15/2014713CleanSuspension3/16/2015 11/2/201523117BBASuspension3/16/20179/8/20171763CRSuspension12/9/20172/9/20186213BBASuspension Sources: CRS, BNPParibasECONOMICSECONOMICS Shahid Ladha , Head of Strategy for G10 Rates Ameri

27、cas | BNP Paribas Securities HYPERLINK mailto:andrew.schneider Andrew Schneider, Economist, US | New York, BNP as Securities Corp | FOCUS20/02/20192 HYPERLINK / | G10 INTEREST RATES HYPERLINK / | G10 INTEREST RATESFor the past 5 years, the debt ceiling has been reinstated automatically at the end of

28、 each suspension period at the prevailing level of debt.In the absence of a timely resolution (ie, agreed extension) of the debt ceiling suspension, the Treasury Secretary typically announces a DISP (Debt Issuance Suspension Period), mandating the use of extraordinary measures and often providing so

29、me X-date, after which the Government is not certain to fund its obligations.While there is uncertainty over the politics and the timing of a future suspension, the sequence of events has a discernible pattern.There are three distinct phases, which become evident particularly in extreme cases of a d

30、ebt ceiling stand-off.Fig. 4: Recent debt ceiling events, cash levels and X-datesYearDateEventCashX-date?20112-Aug-11Federal debt reaches the ceilingCeiling increased from 14.294 to 14.694 (+0.4)2-Aug-112011Federal debt gets close to the ceilingCeilingincreasedfromto(+0.5)2012Federal debt reaches th

31、e ceilingCeilingincreasedfromto(+1.2)201331-Dec-123-Feb-13Federal debt reaches the ceilingDay before the suspension17-Oct-134-Feb-13Ceiling suspended until May 18, 2013Last day of the suspension201316-Oct-13Ceiling reinstated at 16.6994 (+ 0.31)Day before the suspension17-Oct-1317-Oct-13Ceiling susp

32、ended until Feb 7, 2014Last day of the suspension2014Ceiling reinstated at 17.2116 (+ 0.51)Day before the suspension27-Feb-14Ceiling suspended until Mar 15, 2015Last day of the suspension2015Ceiling reinstated at 18.1130 (+ 0.9)Day before the suspension3-Nov-15Ceiling suspended until Mar 15, 2017Las

33、t day of the suspension20177-Sep-17Ceiling reinstated at 19.8088 (+ 1.7)Day before the suspension29-Sep-178-Sep-178-Dec-17Ceiling suspended until Dec 8, 2017Last day of the suspension20189-Dec-17Ceiling reinstated at 20.456 (+ 0.65)Day before the suspension28-Feb-182019Ceiling suspended until Feb 28

34、, 2019Last day of the suspensionSep-19?Cash balance requirement: Cash balance requirement: the of the statutory limit suspension, the US Treasury must have the same operating cash level as the suspension was enacted. The Treasury would reduce T-bill issuance to run down cash to its pre-suspension ta

35、rget. This injects liquidity into the system lower T-bill issuance, and simultaneously bank reserves increasing with less cash held in the Treasury General Account (TGA) the The mechanics T-bill supply (or factors) draining adding liquidity are shown in Figure This can pressure on repo rates and tig

36、hter Libor/OIS spreads despite the debt ceilinguncertainty.Pricing in default risk? While constrained by the debt limit, the Treasury exercises extraordinary measures to the Treasurys borrowing capacity. The government may have its borrowing capacity by a certain namely the X-date, leading to the ri

37、sk of delay. This risk priced in T-bill yields within one month those X-dates (see Figures 7, 9 and 11overleaf).Cash rebalancing: the debt ceiling is suspended (again), the Treasury rebuilds its cash balance at the by increasing its T-bill (and issuance. this can lead to cheapening T-bill yields and

38、 repo rates, and higher LIBOR/OIS spreads, especially in March last year (Figure10).Fig. 5: Liquidity in motion: Treasury and the Feds balance sheetECONOMICSECONOMICSSources: US Treasury, Federal Reserve, BNP ParibasShahid Ladha , Head of Strategy for G10 Rates Americas | BNP Paribas Securities Corp

39、. HYPERLINK mailto:andrew.schneider Andrew Schneider, Economist, US | New York, BNP as Securities Corp| FOCUS20/02/20193Feb-11 Aug-11: National debt reached the ceiling in May 2011, and the ceiling Feb-11 Aug-11: National debt reached the ceiling in May 2011, and the ceiling subsequently increased i

40、n August at the X-date. 4-week T-bill yield priced in some risk payment delay/default before the X-date, while LIBOR/OIS widened quickly after the government released from the borrowing constraint.Feb-13 Feb-14: During the active debt ceiling period, the cash balance was drawing down to meet liabili

41、ties, LIBOR/OIS was tightening and 4-week T-bill yields shot up, signalling the risk of non-payment as the X-date approached.Sep-17 Jun-18: LIBOR/OIS spread rose sharply after the ceiling was suspended in Feb 2018. There was a particularly strong relationship between the US Treasurys cash balance, L

42、IBOR/OIS spread, T-bill stock and 4-week T-bills yields during this period. HYPERLINK / | G10 INTEREST RATESFig. 6: Cash balance vs. 3m LIBOR/OIS (Feb-11 Aug-11)Fig. 7: Cash balance vs. 4w T-bill yield Feb-11 Aug-11)Ceiling reachedCeiling increased/ X- date200Ceiling reachedCeiling increased/ X- dat

43、e1501005000Feb-11May-11Sep-11CashbalanceTargetcash0.20Ceiling reachedCeiling increased/ X-dateCeiling reachedCeiling increased/ X-date0.100.050.00-0.05Feb-11May-11Sep-1118001700160015001400LIBOR/OISSources: US Treasury, Bloomberg, BNP Paribas1MT-billsyieldOutstandingSources: US Treasury, Bloomberg,

44、BNP ParibasFig. 8: Cash balance vs. 3m LIBOR/OIS (Feb-13 Feb-14)Fig. 9: Cash vs. 4w T-bill yield (Feb-13 Feb-14)020Ceiling reinstatedCeiling suspendedCeiling reinstatedCeiling suspended18160.20140.10120.00CeilingreinstatedCeiling X-date1800170016001500Feb-13May-13Sep-13Dec-13 CashbalanceTarget LIBOR

45、/OISSources: US Treasury , Bloomberg, BNP ParibasFeb-13May-13Sep-13Dec-131MT-billsyieldOutstandingSources: US Treasury , Bloomberg, BNP ParibasFig. 10: Cash vs. 3m LIBOR/OIS (Sep-17 Jun-18)Fig. 11: Cash vs. 4w T-bills yield (Sep-17 Jun-18)CeilingCeiling suspended450CeilingCeiling suspended3504025015

46、0500Sep-17 Nov-17 Jan-18 Mar-18 May-18CashbalanceTargetcashLIBOR/OISSources: US Treasury , Bloomberg, BNP Paribas2.00Ceiling reinstatedCeilingCeiling reinstatedCeilingsuspended1.000.50Sep-17 Nov-17 Jan-18 Mar-18 May-18 1MT-billsyieldSources: US Treasury , Bloomberg, BNP Paribas24002200200018001600EC

47、ONOMICSECONOMICSShahid Ladha , Head of Strategy for G10 Rates Americas | BNP Paribas Securities Corp. HYPERLINK mailto:andrew.schneider Andrew Schneider, Economist, US | New York, BNP as Securities Corp| FOCUS20/02/20194N HYPERLINK / oticeN HYPERLINK / oticeThis document has been written by our Stra

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