D.C. ‘X-Date’ Debate Heats Up Amid Lackluster Tax Receipts

When will the US default?

Never. Or at least not in the way that everyone else defaults. The US federal government is, effectively, the only entity on Earth that can’t involuntarily default if you assume the US dollar is the only universally accepted payment method for debts.

It’s generally true that no issuer of any hard currency can involuntarily default, but it’s not strictly or necessarily true. Not every hard currency is everywhere and always acceptable for “all debts, public and private” the same way the US dollar is. I had this discussion with someone on Wall Street a few days ago. Suffice to say that if you find yourself in a foreign country where you “shouldn’t” be, doing something you “shouldn’t” be doing, you want a briefcase full of Benjamin Franklins. Anything other than dollars (even if it’s pounds or euros) could put you in a precarious position. Figuratively speaking, if you go into Sinaloa with a satchel full of Mao faces or even a duffle full of Queen Elizabeths, you might not come out. That tells you a lot about sundry de-dollarization narratives.

At its sole discretion, the US government can issue unlimited quantities of the only universally accepted debt payment method on the planet. So, it isn’t possible for the US government to involuntarily default. On anything. Because, again, everything (including all debts) is payable in dollars.

But the US government can voluntarily default, and in some ways, that’s even more disconcerting than an involuntary default. A voluntary default by Washington politicians in the service of grandstanding would suggest America’s politics has become so fraught — the country’s elected representatives so irrational and so self-interested — that petty partisan rancor takes precedence over global financial stability. That’s a terrifying prospect.

Recent bill auctions demonstrated the extent to which the market is concerned. Some readers have likely seen the figure below by now, but just in case, I thought I’d highlight it.

The yield at auction for three-month bills on Monday was 5.08%, the highest in decades. As discussed in the latest weekly+, a four-week sale three days later produced the lowest yield since October.

The bottom line: There’s voracious demand for paper not exposed to the x-date, and markets are extremely wary of securities maturing in and around the expected “drop-dead” window.

So, when is the x-date? Well, that’s always hard to pinpoint. But, in light of what it’s fair to call escalating concerns, I thought it’d be useful to highlight a handful of best guesses based on tax receipts so far and other assumptions. Below, find a few such guesses from various analysts.

Month-to-date non-withheld income tax receipts through April 20 are now 35% ($138 billion) below last year’s levels and 37% ($149 billion) below the adjusted levels. While we are now through the three most important days of tax receipts in terms of expected volume, the data remain preliminary as we have only received around 56% of the tax collections we expect Treasury to collect this spring. Our base case remains for the debt limit deadline to fall in late July. However, the odds of an early June deadline have edged up over the last three days. If tax receipts continue to undershoot by this degree in the coming days, the odds would tilt slightly in favor of an early June deadline, though non-withheld receipts are currently running at a level that makes it a close call between early June and late July. — Alec Phillips and Tim Krupa, Goldman

Tax receipts so far in April are below last year. If the shortfall continues for the rest of April, the total shortfall from 2022 would be $182 billion. While this shortfall is raising the probability of a June x-date, our base case is an x-date in early August. In Graph 7 we show our forecast of the Treasury General Account. In this forecast, the TGA declines to about $100 billion in the middle of June before corporate tax receipts boost it back up. From there the TGA declines as Treasury exhausts its borrowing space under extraordinary measures, leading to an x-date in early August. — Subadra Rajappa, SocGen

Treasury has cut bill supply by about $125 billion over the past month by lowering bill auction sizes, keeping the market under-supplied as the demand for front-end assets has increased sharply. Alongside increased demand for front-end assets due to enormous market volatility, investors remain highly uncertain about the future path of rates and equities, likely keeping their cash in short-dated securities and waiting for more information. This is why Figure 6 shows that bills inside the 1-month sector are trading extremely rich. Bills in the July-August part of the curve are trading relatively cheap as the market avoids the debt ceiling x-date, which we currently estimate to be in late-July to early-August. While these bills may appear attractive, many investors are avoiding the issues for fear of liquidity and system problems if payments are delayed due to a technical default. While we don’t expect an actual payment delay or default event, these bills are likely to cheapen further relative to OIS. — Gennadiy Goldberg, Priya Misra, Molly McGown, TD Securities