Cash Balance Could Be Precarious By June 9 (2/2)

There are some signs of market distress as a result of debt default concerns, but the largest distortions appear limited to short-dated bill yields / auction dynamics and illiquid credit default swaps. There have been large intraday movements due to developments in negotiations (like Friday's talks "pause" spurring risk-off), but broader markets appear largely calm as the overwhelming expectation is that that a deal will be reached and the US will avoid default.

• An informal MNI client poll run early last week saw no respondents expect an outright US debt default, with an 80/20 split between those expecting a short-term stop gap versus a long-term debt ceiling increase. (More in our Fed Balance Sheet Tracker published Friday). That said, all respondents saw an outright default as USD-negative; none saw it pushing Tsy yields higher (vast majority saw lower yields, some saw mixed curves).
• A few analysts' takes: Wrightson ICAP saw last week's cash flow as "very bad relative to our projections" with a cash balance of <$20B in the week of June 9, though extraordinary measures / cash management bill issuance possibly providing a cushion (ie $19B of cash on hand on June 9, plus $7B of extraordinary "headroom").
• • They note though that the debt limit could conceivably become "binding" by June 1, creating uncertainty about Thursday's announcements for the upcoming week's bill auctions (which would settle June 1).
• Goldman Sachs sees Treasury cash "likely" falling under $30B by June 8-9, with "even odds that the Treasury exhausts its funds entirely at that point".
• Their scenarios include a "full-fledged deal that suspends the debt limit to early 2025 along with spending caps" at 70%, a 15% chance of a short-term extension, 10% of fudging payments/borrowing caps temporarily, and 5% it revises the projected deadline to July if cash flows are better-than-expected.

US 1Y and 5Y Credit Default Swap, bpsSource: BBG pricing