Wells Fargo on Tsy Debt Ceiling
Wells Fargo Advantage Funds released its latest "Overview, Strategy, and Outlook" portfolio manager commentary, which discusses the Treasury's debt ceiling. It reads, "With the U.S. government having recently entered a debt-issuance suspension period, quietly financing its deficit operations using what are euphemistically called extraordinary measures, the debt ceiling is likely to remain a back-burner issue through the summer before heating up in the fall. Here we explore the issue in greater detail, providing lazy-summer beach reading while the issue simmers in the background.... For the 13-month period that ended March 15, 2015, the U.S. Treasury operated without a debt limit because Congress had suspended it until that date. With the debt limit reestablished, the Treasury went from having no debt limit at all (carte blanche) to being tapped out (the public debt essentially at the limit) in one fell swoop. Talk about feast to famine! Taking the first steps down a well-trodden path, Treasury Secretary Jack Lew notified Congress in a March 13 letter of his intention to declare a "debt-issuance suspension period," allowing the Treasury "to employ further extraordinary measures to continue to finance the government" and specifying the expected actions.... At some point later this summer or early this fall, the Treasury will have exhausted those [extraordinary] measures, and the debt ceiling will begin to bind. The issue will then collide with Treasury's new policy of maintaining a larger operating cash balance, which it announced on May 6, explaining: "Events that have occurred over the last 15 years, such as the terrorist attacks on September 11 and Superstorm Sandy, have caused disruptions to the broader financial system and Treasury's auction capabilities ... to help protect against a potential interruption in market access, Treasury will hold a level of cash generally sufficient to cover one week of outflows in the Treasury General Account, subject to a minimum balance of roughly $150 billion."" Wells adds, "The prospects for the upcoming debt ceiling engagement are unclear. In the recent past, we have had incredibly messy political battles that became global focal points for the financial world, where investors actually sold or avoided Treasuries to find something safer. We've also had occasions where the limit was raised with little fanfare or rancor. However it plays out, one position we've taken during previous disputes is unlikely to change. To borrow from our September 2013 Outlook: "We do believe an accord will be reached, and while the consequences would obviously be quite severe, we would assign an extremely low probability to a default or disruption in the market for Treasury securities." Until the day comes when Congress takes action, market pundits will content themselves with issuing forecasts of the exact date the Treasury is in danger of default, absent any congressional action."
