According to a recent note published by
JPMorgan to its clients, the U.S. debt ceiling is
expected to become a major issue as early as
next month. The Wall Street bank has ascribed
a "non-trivial risk" of a technical default on
U.S. Treasuries, adding that both the debate
over the debt ceiling as well as the one on the
federal funding bill are expected to run
dangerously close to their final deadlines.
JPMorgan's U.S. rates strategy team has warned
that the Treasury could run out of available
resources by the middle of August, which could
lead to a potential technical default on U.S.
Treasuries. The debt ceiling represents the
maximum amount that the U.S. government can
borrow to meet its financial obligations. Once
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.
JPMorgan further added that "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."
U.S. Treasury Secretary Janet Yellen is expected
to revise the X-date in the next few days, which is
currently set for early June. The X-date
represents the date by which the federal
government can no longer meet all its
obligations in full and on time absent actions by
Congress.
As a result of the looming debt ceiling crisis, U.S.
credit default swaps, which are market-based
gauges of the risk of a default, have reached
their highest level since 2012. These contracts
are denominated in euros, as investors look to
lower their exposure to dollar-denominated
assets.
The U.S. government is expected to take steps to
address the looming crisis, but the situation
remains unpredictable, and market participants
are advised to closely monitor developments in
the coming months.
Social Plugin