The US Is Close To Default Based On Tax Day Cash

Since the political battle over the debt ceiling is all set to escalate again, looking at an analysis of the Treasury's tax receipts will give us a better idea of how much cash it will have on hand when it comes to approaching the limits that will hinder it from borrowing after it reaches the $31.4 trillion cap that will keep it from borrowing any more.

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There is currently no clear estimate for that so-called drop-dead date, but investors and officials are hoping that by the time it arrives, they will have a better idea as to when it will actually happen.

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It is important that the US taxpayers file their annual taxes and make payments as soon as possible for the amounts they believe are due to the government, because this Tuesday is the deadline for most taxpayers to get their paperwork filed. The funds should show up in the Treasury's bank account shortly afterward, which should help its rapidly dwindling cash inventory.

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Ultimately, the question is whether and by how much this money will keep the Treasury stocked until around June when there will be an additional influx of tax dollars. This will allow the government to utilize additional accounting tricks aside from the ones that are already being employed in order to keep the government from falling into a precipice as the government is on the verge of bankruptcy.

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It would appear that Bank of America analysts Mark Cabana and Katie Craig, in a note to their clients, maintain their current base case of an X-date of mid-August but see risks skewed in the direction of earlier," they wrote, discussing the point at which the US would be at the end of its headroom.

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According to their view, a boost in Treasury cash following this week's tax day would be considered as a positive trend, whereas an increase of less than $150 billion would be classified as a weak trend, based on past historical trends.

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Speaker Kevin McCarthy is preparing to present this week his proposal for suspending the debt ceiling for one year in anticipation of the narrowing window for negotiations that are likely to increase lawmakers' focus in the coming weeks. A source familiar with the matter is that McCarthy plans to unveil his proposal this week. The Republicans have always sought to tie any deal with a budget cut, while the President has insisted that the budget and ceiling issues should be dealt with separately.

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In the following, we will discuss several of the ways of gauging just how jittery markets are getting right now and which time frames are most concerning to them.

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Dislocations of the bill curve

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You should keep an eye out for investors who may demand higher yields from securities that will be repaid shortly after the United States runs out of borrowing power. In past episodes, this has resulted in a peculiar kink in the curve around the most vulnerable point of the curve because the government cannot sell fresh securities and get cash to repay holders. In the short term, there are some dislocations surrounding various maturity dates, but there is no clear-cut spot. However, uncertainty surrounding the Federal Reserve's interest-rate policies in the near term is also complicating matters. The key question is whether a clear distortion is apparent at any time. If that occurs, then it is a huge red flag that will need to be addressed.

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Yields on relative basis

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There is a logic at work here that pushes investors to avoid certain more vulnerable securities, but also pushes investors to seek out alternatives whose dates are less risky. There have been some instances where a security that matures sufficiently ahead of the likely ceiling crunch point, for example, a one-month or two-month T-bill, is becoming more and more popular. In spite of Fed benchmark increases, the rate they offer in comparison with overnight index swaps has declined while the absolute yield on these short-term bills has increased along with the rest of the curve. Traders use those instruments to bet on central bank rates, so in a sense the gap is a measure of the bills' popularity once you take away monetary policy expectations, so that you can determine their popularity.

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Demand for auctions

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A number of investors have shown a preference for certain maturities of government bills, and they may also demonstrate this preference by not holding paper maturing at riskier dates at regular government bond auctions. During last week's four-week bill auction, yields plummeted compared to the previous week due to the overwhelming demand for the $60 billion offering by buyers. Similar preferences for shorter maturities were also evident in the eight-week offering. A noticeably more lackluster auction session has been observed compared to some of the auctions for the securities that will mature in the summer.

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Default insurance

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Credit default swaps for the US government are also one of the most important markets to watch. Activity has been upped in recent months, and pricing has surged beyond levels seen in previous debt-cap episodes, indicating a higher default probability.

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Cash shortages in the government

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Despite the fact that this metric is not based on market prices, the Treasury's cash balance may be one of the most stark indicators of how close America is to the edge. It is quite common for Treasury officials to draw down the amount of ready cash it has in reserve as the debt limit approaches, so they can avoid borrowing excess money that isn't immediately needed.

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There was around $99 billion in cash on Thursday and around $87 billion in cash on Wednesday, which was the lowest amount since December 2021, when the United States was also grappling with the debt ceiling debate. It is important to note that there is not much leeway for the government at this time, given the fact that the amount of money can vary by tens of billions of dollars in one day and was over half a trillion dollars in February.

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Thus, the size of the tax take this week is crucial. It's also likely to bridge the gap until the next available extraordinary measure on June 30, when some taxpayers have installments due — or even beyond that, if receipts are really good — if it's big enough to get the Treasury through to June 15 — when some payers have installments due. However, if revenues don't meet expectations, it's possible that the government will not even make it to June 15, which means that the government has very little time to find a legislative solution before it's too late.