Democrats at fork in the road, may not take it

There were media reports that Treasury Secretary Janet Yellen recently warned House Speaker Nancy Pelosi that lawmakers have until some point in October to raise the debt ceiling before the Treasury exhausts its accounting gimmicks.

Lawmakers will raise the debt ceiling, but the next several weeks could be dicey in the bond market because of political hand wringing about the debt.

We had previously estimated that the drop-dead date for raising the debt ceiling was November 18, but odds are that this could be brought forward once we get the August Treasury budget data on Monday.

The key will be how much remains of our estimate of the remaining balance of extraordinary measures. That could move the drop-dead date for raising the debt ceiling into early November, or even late October.

The bond market is showing a little angst about the debt ceiling.

This isn’t surprising, but it’s important to note that the amount of concern is small because the bond market has been through numerous debt-ceiling episodes and knows how it will play out—the debt limit will ultimately be raised.

Currently, all Treasury bills from late October to November—the likely drop-dead date for raising the debt ceiling—are trading a touch cheaper than other Treasury bills. This is similar to what has happened leading up to prior debt-ceiling drop-dead dates.

Lawmakers need to get moving on this. Democrats may include a debt limit suspension in the upcoming continuing resolution, which would fund the federal government beyond this fiscal year, avoiding a government shutdown.

However, Republicans would need to not filibuster it, allowing the legislation to pass with 51 votes. Even in this scenario, the continuing resolution would need unanimous support among Senate Democrats. This is just one way to raise the debt ceiling and it is possible that Democrats may opt for a different path.

Earlier on Wednesday, Pelosi said the debt limit suspension would not be part of the continuing resolution. Therefore, Democrats could be opting to not take the path of least resistance.

Back-to-school shopping for corporate bonds

After a normal August lull in U.S. corporate bond issuance, September is off to a strong start. Tuesday was a very busy day with at least 20 companies tapping the U.S. high-yield bond market.

The week after the Labor Day holiday is normally one of the busiest periods of the year, but this year will likely see more issuance than normal because of low volatility, tight high-yield corporate bond spreads, and some urgency to issuance ahead of the Federal Reserve beginning to taper its $120 billion in monthly asset purchases.

High-yield corporate bond issuance should be very strong this month, exceeding that seen over the past few years.

For perspective, average U.S. dollar denominated highyield bond issuance over the past five Septembers was $47 billion.

For investment grade, average U.S. dollar denominated issuance over the past five Septembers was $163 billion.

Separately, we will be watching leverage loan issuance as, once again, September is normally a strong month.

Some of the angst about the taper stems from what occurred during the so-called “taper tantrum” in 2013.

During that episode, there was a noticeable but temporary hit to liquidity in the U.S. corporate bond market. In 2013, ICE BofA’s corporate bond index’s total returns also declined. Comparing today with 2013 is comparing apples and oranges.

We expect a significantly more muted response this time around because the Fed has made a clear distinction between its balance sheet and interest rate policies. Therefore, timing of the tapering has no implications for the timing of the first increase in the target range for the fed funds rate.

Also, markets have now been through a taper, a fact that should pay dividends this time around.

Another reason to be confident that the market will not overreact to this taper is that earlier this year the market digested the central bank’s winding down of its corporate credit facilities, which caused no problems in financial markets.