JPMorgan sees “non-trivial risk” of a technical default on U.S. Treasuries as debt ceiling looms
5:50 am Thursday, April 20th, 2023
LONDON (Reuters) – JPMorgan expects the U.S. debt ceiling to become an issue as early as next month with the Wall Street bank ascribing a “non-trivial risk” of a technical default on U.S. Treasuries.
In a note published to clients late on Wednesday, JPMorgan said it expected both the debate over the debt ceiling as well as the one on the federal funding bill to run “dangerously close” to their final deadlines.
The bank said its U.S. rates strategy team expects the Treasury could run out of available resources by the middle of August.
The debt ceiling is the maximum amount the U.S. government can borrow to meet its financial obligations. When the ceiling is reached, the Treasury cannot issue any more bills, bonds or notes. It can only pay Treasury bills (T-bills) through tax revenues.
“Signs of stress typically start in the T-bill market 2-3 months before the X-date given money market funds (MMF), which are large holders of T-bills, will begin to more actively advertise that they don’t hold any bills that mature over those dates,” JPMorgan said.
Treasury Secretary Janet Yellen is expected in the next few days to revise the X-date – or the date by which the federal government can no longer meet all its obligations in full and on time absent actions by Congress – which is currently early June.
U.S. credit default swaps, market-based gauges of the risk of a default, this month hit their highest level since 2012. Those contracts are denominated in euros, as investors lower exposure to dollar-denominated assets.
(Reporting by Karin Strohecker; editing by Dhara Ranasinghe)
