“Debt ceiling” economics
Laurie Mount, Portfolio Manager on the BlueBay U.S Fixed income team, discusses how the budget negotiations in Washington DC are complicating the T-bill market dynamics.
Key points:
- The Senate continues to work on passing the One Big Beautiful Bill, but it faces an uphill battle.
- One consequence of the negotiations is that the US Government faces potential default if the “debt ceiling” can’t be raised in time.
- This has led to a shortage of T-bills, which is a challenging for money market funds.
- We expect rates to stay unchanged at this week’s FOMC meeting.
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Welcome back to The Weekly Fix. My name is Laurie Mount, Portfolio Manager with RBC’s BlueBay US Fixed Income team focusing on cash management strategies.
Talks of raising the debt ceiling was back in the headlines again last week as the Senate continues to work on getting the One Big Beautiful Bill passed through Reconciliation, which allows them to bypass the 60-vote threshold in the Senate and cut Democrats completely out of the process. Once the Senate releases their version, it still faces an uphill battle as it goes to the Senate Parliamentarian to weed out provisions that do not comport with the Senate Budget provisions. If they are unable to raise the debt ceiling in time, the US faces the potential for default. The CBO projected last week that the “x” date is between mid-August and September.
Since January, the supply of Treasury bills has been shrinking when the U.S. hit its $36.1 trillion debt limit. This shortage of supply could affect money market funds as they are one of the largest purchasers of treasury bills. To offset the dwindling treasury bill supply, money-market funds also can invest in somewhat longer-duration Treasury securities, repurchase agreements and other government-related assets. With money-market funds at record highs north of $7 trillion dollars many are turning to the Fed’s Reverse Repo facility as another option. Once the debt ceiling issue is resolved, we would expect to see bill supply resume its normal issuance patterns.
With uncertainty around the exact “x” date we are seeing dislocation in the bill curve for maturities in the August-September window with some money market yields as high as 4.37%. Until the debt-ceiling issue is resolved, although attractive, we will avoid purchasing treasury bills with those maturities and continue to emphasize safety and liquidity versus a higher yield.
This week the FOMC will meet and we are expecting rates to stay unchanged. During this meeting, the Fed will release their updated dot-plot and it is likely that the median forecast will be for one 25-basis point cut in 2025.
Given the uncertain macro backdrop, we don’t expect to see much clarity with respect to policy: the economy is doing fine at the moment and it is clear that their dual mandate of employment and inflation is not being challenged. This can serve as further justification for the FOMC to take a firm stance in its wait-and-see approach.
During the press conference Chair Powell is likely to face questions as to why he is not easing policy more rapidly among many other things. We will continue to keep a watchful eye on Fed-speak in the days ahead.
As always, thank you for joining us today and have a great week!
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