I wrote the other day (April 19) about speculation that the debt-ceiling crunch (the “X-date”) might occur in June rather than in distant August.

And then there was this from Bloomberg (April 21):

Investors right now are demanding higher yields on securities that are due to be repaid shortly after the US runs out of borrowing capacity. That’s because the government won’t be able to sell fresh securities and get cash to repay holders.

In past episodes, that’s created unusual kinks in the yield curve around the most vulnerable point and there’s evidence of dislocations appearing at present. Without a specific deadline to coalesce around, investors who are able to are shunning to some degree securities in the June to August period, driving yields there higher. The picture is muddied somewhat by uncertainty over the path of Federal Reserve policy rates, but the amping up of angst is unmistakable.

Auctions in the past week have provided one of the clearest insights of that dislocation. Demand for Monday’s sale of three-month bills — securities that mature right in the danger zone of July — was so lackluster that the yield they had to offer was the highest since Bill Clinton was president in 2001. A one-month auction on Thursday, by contrast, was snapped up at the lowest yield in half a year, well below much of the existing bill curve.

Beyond T-bills, one key market to watch is what happens in credit default swaps for the US government, which have continued to lurch to new highs in the past week.

Ultimately, it all comes down to whether the Treasury can stretch out the cash it has on hand right now — and the additional revenue that it will receive over the coming weeks — until some kind of political deal is done. Investors, therefore, are going to be keeping a close eye on how much cash is coming in and going out of the Treasury’s bank account at the Fed.

Receipts from the day of the Internal Revenue Service’s main filing deadline, April 18, were somewhat underwhelming and boosted the cash balance by just $108 billion on the day. All eyes, therefore, are going to be on the ongoing trickle from later payers over the coming weeks to see if that’s enough.

The key hump to get over is June 15, when a batch of corporate tax payments come due. If the Treasury can make it to that point, it can probably also hold on until June 30 when the the Treasury can implement another batch of extraordinary measures — the accounting gimmicks its been using to avoid breaching the statutory cap.

After that, it’s then a question of whether the money lasts until July or August — or even later. But the risk remains — and Wrightson ICAP economist Lou Crandall currently puts it at around 15% — that officials will be on the precipice of running out of cash in June.

So, for now, watch tax receipts. . . .

In my earlier post, I mentioned the importance of investors who hold government debt keeping calm should the ceiling not be raised and the X-date dawns. If they believe that a deal to raise the ceiling will still be agreed upon before too long, and don’t dump their holdings, that will help manage what is — whatever happens — going to be a very tricky period. I also referred to the fact that those investors include money-market funds, and, for that matter, investors in them. Even if the market professionals who manage those funds remain relatively calm, what if enough of the retail clients invested in them do not? If they start pulling their money out, that will (after the redemptions reach a certain level) force the managers of those funds to start selling. Such sales, which could well be at a loss, would not only put pressure on liquidity in the treasury market (which would then hit prices still further), but would risk setting off a chain reaction as other investors decide to rush for the exit.

What’s more, if investors come to think that the current impasse will not be resolved, this could begin before the X-date.

Under the circumstances, this from the GAO made interesting reading:

During the 2007-2009 financial crisis, investors in money market mutual funds “ran” — cashed in their shares at the same time — to avoid losses. In 2014, SEC tried to prevent runs by revising its rules. The change allowed funds to impose a “gate” to temporarily block investors’ access to shares if the funds were low on cash and assets easily sold for cash.

But during the pandemic, investors ran again — with many cashing in shares to avoid a potential gate.

In 2022, SEC proposed a rule that could reduce run risk — partly by removing gates — and provide more data to monitor risks at these funds. SEC plans to finalize the rule in April 2023.

Hmm. . . .