Via Stephen Stanley at Amherst Pierpont Securities:
In addition to the Ides of March and Fed day, today is also the day that the current debt ceiling “expires.” Here’s a brief explanation of what is happening today and what it means. This might be worth filing away somewhere because this will come up again. I promise.
Back in the day, when Congress raised the debt ceiling, they would just add some amount, say $1 trillion, to the existing debt ceiling, a relatively simple move (though certainly easier said than voted for!). However, during the crisis, when deficits were surging out of control, federal debt was rising so fast that the debt ceiling issue was coming up too frequently. In addition, under that structure, Congress and the Administration had limited control over when the debt ceiling would become a binding problem, leading to the prickly political issue rearing its head at inconvenient times. So, someone figured out that it would be better to just put a time deadline on the debt ceiling, which is how Congress and the Obama Administration handled the issue over the past several years.
Here’s how it works: a law is passed that says the debt ceiling is suspended until a certain date. The last such legislation established March 15 as the deadline, so here we are. Republicans in Congress did not trust the Democratic Administration to avoid playing games with this new approach, so the legislation also stipulates that Treasury has to get the cash balance down to a specific level (otherwise, Treasury could manipulate the debt ceiling up by borrowing more than necessary). That level happens to be $23 billion.
Back when this new debt ceiling arrangement was first established, that level of cash balance was low but not egregiously so. Since then, however, Treasury has decided that prudent cash management requires a much larger cash balance, in the neighborhood of $300 billion on average. As a result, every time the debt ceiling deadline arises, Treasury has to spend months winding the cash balance down from its normal run rate all the way to $23 billion. Thus, every time the debt ceiling deadline approaches, Treasury bill supply has to be slashed to get the cash balance down.
In any case, what happens now is that a level is set for the debt ceiling. Then, Treasury will unleash its quiver of “extraordinary measures” to create additional room to borrow. These are a variety of things, mostly “defunding” several different trust funds, i.e. replacing one type of IOU (nonmarketable Treasury debt) that counts against the debt ceiling for a different type (a literal IOU) that does not. Then, it is just a matter of how long Treasury can hold out using these extraordinary measures before the debt ceiling actually begins to bind.
This time around, the timing is fortuitous (not a coincidence). Federal government cash flows are quite seasonal, and the biggest inflow of cash all year happens to be coming up (April 15 tax date). So, once we get over that hump, inflows will carry the Treasury for quite a while, probably through the summer and into the fall based on current estimates. Thus, from a market perspective, nothing happens today. Then, starting tomorrow, bill supply will begin to normalize and the cash balance will rise. And then, nothing for several months until the extraordinary measures near exhaustion. And then the political war over raising the debt ceiling kicks in and the Treasury market starts to get nervous.