Speaker 1: One of the things that made America great is the
Speaker 1: breadth and depth of the US government bond market. That is,
Speaker 1: the belief that the full faith and credit of the
Speaker 1: USA is the ultimate safe asset. Even in the depths
Speaker 1: of two thousand and eight, the one thing there was
Speaker 1: great demand for was U S Treasury securities. They're the
Speaker 1: things the US selves to make up for any shortfall
Speaker 1: between what the government needs to finance spending authorized by
Speaker 1: Congress and what it brings in from revenue that would
Speaker 1: be taxes. Now. Critical to that market is a thing
Speaker 1: called the debt ceiling, strict limits imposed by Congress on
Speaker 1: how much debt the United States can have, and as
Speaker 1: Congress typically isn't great at balancing its books, there have
Speaker 1: been exceptions every couple of years that debt ceiling has
Speaker 1: to be raised. No one loves voting for it, but
Speaker 1: they do love the things that government programs can deliver
Speaker 1: for their districts and states, and they know it has
Speaker 1: to be done and that time is just about with
Speaker 1: us once more. Welcome to Benchmark, a podcast about the
Speaker 1: global economy. I'm Daniel moss I cover global economics for
Speaker 1: Bloomberg View in New York. Our two special guests today
Speaker 1: are Alex Harris and Brian Shappatta, who cover the US
Speaker 1: bond market for Bloomberg News. And a special shout out
Speaker 1: to Alex, who once worked in the bond market. So
Speaker 1: why is this problem coming at this particular time? Isn't
Speaker 1: this just a Washington ritual that always ends up getting resolved.
Speaker 1: They walk up to the line, then there's a deal,
Speaker 1: and then the issue goes away. You know, Dan, it's
Speaker 1: not you know, it's the walk out to the line.
Speaker 1: But I think given the year we've seen new administration,
Speaker 1: Republican Congress, and they have both the House and the Senate,
Speaker 1: you know, the expectations they get more done. But now
Speaker 1: after the dysfunction of healthcare, people are just assuming now
Speaker 1: that we're going to see the same dysfunction as we
Speaker 1: walk up to the debt limit, and they don't want
Speaker 1: to take that risk. They investors don't want to risk
Speaker 1: being caught off guard. Um if Congress cannot get a
Speaker 1: deal done in time. And just so we clear of Brian,
Speaker 1: we have had situations such as during the George W.
Speaker 1: Bush administration where there was a Republican in the White
Speaker 1: House and Republicans controlling at least one chamber of commas. Again,
Speaker 1: let me press you on this. We've been here before,
Speaker 1: haven't we, And it's been resolved yes, And I think
Speaker 1: the expectation is, of course that ultimately it will be
Speaker 1: resolved again. But the issue that is, you know, confronting
Speaker 1: traders right now is how do we how do we
Speaker 1: play this? I mean, we do have an administration that
Speaker 1: has been especially volatile um and hasn't really gotten a
Speaker 1: lot of things done that even with the goop control
Speaker 1: of the legislative chambers, uh, they still manage to get
Speaker 1: anything through. So there is this concern that you know,
Speaker 1: ultimately warring factions within parties will make this time different.
Speaker 1: What does this mean for me? Well, Betty, yet, what
Speaker 1: does it mean for our producers? Eighty year old mother?
Speaker 1: What does it mean for the person standing in front
Speaker 1: of you in the line at Starbucks? Why should't they care?
Speaker 1: So leading up to it, there's a series of major
Speaker 1: payments that Trugury has to make every month. This includes um,
Speaker 1: a large Social Security payment on you know, the first
Speaker 1: week of the month of every month. This also includes
Speaker 1: veterans payments, military payments, civil service payments. If Tarugury cannot
Speaker 1: borrow that money, they don't get their checks. So now
Speaker 1: Congress's biggest concern is having these constituents, our producers, eighty
Speaker 1: year old mother, you know, calling and saying, why can't
Speaker 1: I get my Social Security payment? Why is this not
Speaker 1: coming through? If this is so imperative to things like
Speaker 1: Social Security payments and paying salaries for our men and
Speaker 1: women in uniform, why on earth does Congress even hesitate.
Speaker 1: I think Congress enjoys having the power of accountability. I
Speaker 1: think that they really feel like this is in the Constitution.
Speaker 1: It says we have this power, we can authorize borrowing
Speaker 1: on the U s is dime, and they don't want
Speaker 1: to do away with that because there is this concern
Speaker 1: that in the future, you know, maybe an executive or
Speaker 1: future congressional officials would not be as accountable as they are,
Speaker 1: and it's something that is important to a lot of constituents.
Speaker 1: Let's take a step back. Not every major economy is
Speaker 1: in this situation. How did we get to a situation
Speaker 1: where we have this debt ceiling and oh my god,
Speaker 1: there's this saga or oh god, it's just a Washington ritual.
Speaker 1: I mean, many countries in Europe don't go through this.
Speaker 1: Canada doesn't go through this. Why US, you know, and
Speaker 1: initially started back um under Woodrow Wilson with the war
Speaker 1: and you know, you had to authorize all this spending,
Speaker 1: so they impose this debt ceiling in order to keep
Speaker 1: the costs under control. And I think then you just
Speaker 1: have this history of politicians believing that this is the
Speaker 1: way to help keep deficits in check, to keep our
Speaker 1: spending in check. Unfortunately, now it just seems like it's
Speaker 1: come down to this you know, biennial song and dance
Speaker 1: from Washington, where they posture about it and they gripe
Speaker 1: about the deficits exploding and then they raise it anyways.
Speaker 1: So um, you know, it's one of those pieces of
Speaker 1: our history that we can't seem to abolish, even though
Speaker 1: former Treasury Secretary jacklou issued a paper earlier this year,
Speaker 1: you know, advocating for the elimination of the debt ceiling altogether.
Speaker 1: So what a market's telling us about what's going to
Speaker 1: happen this time? Same old, same hold or is it white?
Speaker 1: Actually this time it could be different. You know, we're
Speaker 1: actually starting to see a little bit of miss pricing
Speaker 1: in treasury bill markets, and what we're seeing is you know,
Speaker 1: investors do not want to hold Treasury bills that are
Speaker 1: maturing in October because they feel like if Congress can't
Speaker 1: get a deal done, that's when you might see Treasury
Speaker 1: say we can't we can't pay, we can't pay out,
Speaker 1: we can't retire that debt, we can't pay principle. And
Speaker 1: you know, so everyone's leaving those Treasury bills. They prefer
Speaker 1: to hold securities maybe you know that mature in November,
Speaker 1: mature in September because they just don't want to be
Speaker 1: vulnerable to any sort of default on our debt. And
Speaker 1: because of all the dysfunction we've seen in Washington, these
Speaker 1: concerns have sort of appeared earlier than normal. Usually what
Speaker 1: you'll see is the bill market and investors start to
Speaker 1: get nervous around middle the middle of September. It's at
Speaker 1: the end of September, and now we're starting to see
Speaker 1: in July because after that Healthcare um vote, people just
Speaker 1: don't trust Washington. And it's the idea being that if
Speaker 1: the White House and Congress controlled by the same party,
Speaker 1: then legislation ought to be a slam dunk exactly. And
Speaker 1: you know, when I spoke with people, you know, after
Speaker 1: Donald Trump was elected last November, and then before the
Speaker 1: debt ceiling was reinstated in March of this year, analysts
Speaker 1: on Wall Street said, this is going to be really easy.
Speaker 1: You know, we have Republican controlled Congress, we have Republicans
Speaker 1: in the White House. There's no way they're going to
Speaker 1: fight over this. And now everyone's sort of having a
Speaker 1: rethink about about this attitude, Brian. Has any of this
Speaker 1: ever come to pass? Has the US ever missed a
Speaker 1: payment as a result of the debt ceiling standoff? That's
Speaker 1: a funny story. In nineteen seventy doesn't sound too funny,
Speaker 1: well not to some people. In nineteen seventy nine, the
Speaker 1: federal government did briefly default. They blamed it on a
Speaker 1: technical book keeping glitch and not a true default, but
Speaker 1: technically they did, uh fail to pay interest on some
Speaker 1: of their debt at that point. And then there's also,
Speaker 1: you know, obviously the sort of gold bug wing does
Speaker 1: feel like the US has sort of backed off of
Speaker 1: its obligations several times in the past. When you know,
Speaker 1: we used to have some sort of you know, fixed
Speaker 1: gold to dollar ratio, and you know, generally that was
Speaker 1: abolished over the course of you know, from the thirties
Speaker 1: to the seventies. Now, when you talk about that incident
Speaker 1: in nineteen nine, you might could sound like that was
Speaker 1: distinct from the issue of the ceiling. I mean, it
Speaker 1: was due to a delay in raising the debt ceiling um,
Speaker 1: but they did blame it on word processing problems. And
Speaker 1: uh so these bills maturing in April six, May three,
Speaker 1: and May ten were the ones that were affected by that.
Speaker 1: But you know, there is a concern that that could
Speaker 1: happen again this time, if you know, even if they
Speaker 1: don't raise the debt ceiling by you know, a week,
Speaker 1: it's a big issue for four week bills, even if
Speaker 1: it's delayed, you know, by a week. Could you imagine
Speaker 1: having a four year bond that you get paid after
Speaker 1: five years. I mean, it's basically the same thing. You know,
Speaker 1: days matter for people who are invested in short term debt. Okay,
Speaker 1: now it sounds like the the end of the world
Speaker 1: didn't happen. Most people remember the eighties as a pretty
Speaker 1: good year for financial markets and for the US economy
Speaker 1: in many ways. Yeah, I mean, some people argue that
Speaker 1: borrowing costs did go up after that episode of brief
Speaker 1: technical default. And that's sort of an outstanding question in
Speaker 1: this sort of new macro environment, where there's so much
Speaker 1: more central bank intervention and yields are so low across
Speaker 1: the world, whether borrowing costs will go up. But again,
Speaker 1: that matters for anybody that's living in the US, because
Speaker 1: higher borrowing costs mean ultimately a squeeze on other types
Speaker 1: of social programs. Yeah, I was gonna say to Brian
Speaker 1: talks about nine. But actually, during the two thousand and
Speaker 1: fifteen debt ceiling episode, Treasury actually had to delay its
Speaker 1: two year auction by a week. They were so concerned
Speaker 1: that they weren't going to be able to borrow that
Speaker 1: money that they delayed it just to cover themselves and
Speaker 1: make sure that they were okay. Issues surrounding the debt
Speaker 1: ceiling US sometimes equated with the broader issue of a
Speaker 1: government shutdown. Are they the same thing or do they
Speaker 1: sometimes just coincide? What's the distinction between them? They sometimes
Speaker 1: happened to coincide. The last time we had a government
Speaker 1: shutdown coincide with the debt ceiling issue was in two
Speaker 1: thousand and thirteen. UM. But really what it is is
Speaker 1: the government shutdown is related to the new budget and
Speaker 1: future spending. The debt ceiling is usually related to previous spending.
Speaker 1: I think Treasury Secretary Minution you know, says quite succinctly,
Speaker 1: we're just trying to borrow or payback what we've already spent.
Speaker 1: And and that's really the difference is that it's it's
Speaker 1: the future against past, past spending. Now, one thing you
Speaker 1: often here is when people advocate an increase in the ceiling,
Speaker 1: they say, this doesn't mean we're going to spend more.
Speaker 1: This merely pays full of spending authorizations that Congress has
Speaker 1: already made true or false. Oh, I think that's that's false,
Speaker 1: because what happens in the way these debt ceilings have
Speaker 1: been resolved since in the last few years is they
Speaker 1: go into what's called the debt ceiling suspension, where they say, Okay,
Speaker 1: we're just going to suspend the debt ceiling. We're an
Speaker 1: authorized you know, payments, and you can keep borrowing, but
Speaker 1: at a later date, we're going to reinstate it at
Speaker 1: the level in which we've already continued to spend. So,
Speaker 1: for example, when the debt ceiling was suspended and a
Speaker 1: deal was reached in November early November, I think our
Speaker 1: debt limit was about eighteen point I think we're about
Speaker 1: eighteen point one trillion. When the debt ceiling was reinstated,
Speaker 1: the new limit was nineteen point eight trillion. So they
Speaker 1: keep spending. So you know, that's why I think. You see,
Speaker 1: you know, former Treasury secretaries such as Jack Lewis, and
Speaker 1: this is just a ridiculous exercise at this point because
Speaker 1: we're still spending that money. Again, Brian, to come back
Speaker 1: to something that you mentioned earlier, Congress, under a Republican
Speaker 1: president and with Republican majorities in one or both houses,
Speaker 1: has time and again increased the debt ceiling, no matter
Speaker 1: what they may have said when they were in opposition.
Speaker 1: So again, what's different this time? Does it concern the
Speaker 1: current occupant of the Oval Office? Is that what's different?
Speaker 1: I mean I think it does. I mean, you have
Speaker 1: people who can't get out of their minds. You know,
Speaker 1: hearing Donald Trump say that maybe the US needs a
Speaker 1: good shutdown on Twitter. You know, Alex has just told
Speaker 1: us that's not necessarily the same thing. No, it's not,
Speaker 1: but it sort of gives you a sense of his
Speaker 1: frame of mind. Um, he's willing to you know, throw
Speaker 1: chaos out there and hope that something better comes of it.
Speaker 1: He's also floated, you know, more directly to the debt ceiling.
Speaker 1: You know, he's talked about potentially restructuring debt. He's called
Speaker 1: himself the King of debt, and he said, you know,
Speaker 1: we can get a better deal on our treasuries, which
Speaker 1: is just something that you don't hear ever anywhere in markets.
Speaker 1: So we talked in our intro about how the US
Speaker 1: bond market has the most depth and the most breadth
Speaker 1: and is the most credit worthy of any in the world. Now,
Speaker 1: if that is true, don't people have a few other
Speaker 1: choices where to go? Even if the debt ceiling isn't
Speaker 1: raised in time to avoid the US skipping its obligation
Speaker 1: to be it for a couple of weeks, a couple
Speaker 1: of days, a couple of hours. Ultimately, isn't there nowhere
Speaker 1: else for people to go? I think that's about right.
Speaker 1: And what you hear from investors is that you know,
Speaker 1: and the reason there's such a delayed reaction, or there's
Speaker 1: a what we'd call a non reaction in other parts
Speaker 1: of the treasury market is that, you know, they're confident
Speaker 1: that even if there's the slightest technical to fault, be
Speaker 1: it for a couple of days or a couple of weeks,
Speaker 1: that other parts of the bond market are going to
Speaker 1: be okay, that as long as you know, they receive
Speaker 1: interest payments, you know later they'll be fine, you know.
Speaker 1: So it's there is so much depth to your point
Speaker 1: that they can go elsewhere. And that's also what you're
Speaker 1: seeing from money market managers who are saying, well, we
Speaker 1: don't have to be in October treasury bills. And in
Speaker 1: fact they're telling clients that they're not in October treasury bills.
Speaker 1: But they said, you know, we have the repo market,
Speaker 1: you know, which is an overnight funding market, and they
Speaker 1: have the Federal Reserve has what's called an overnight reverse
Speaker 1: rebo facilities, So they and go there and they can
Speaker 1: they can borrow and get securities from them as well
Speaker 1: to stay invested in to keep earning that yield for
Speaker 1: their investors. Now, Paul Krugman, in a recent column has
Speaker 1: talked about this stand off potentially illustrating a crisis in
Speaker 1: US governance. And that's ultimately what this is about, not
Speaker 1: whether it ultimately passes or not, and not whether investors
Speaker 1: keep coming into treasuries or not that it could be
Speaker 1: something deeper and more insidious, more corrosive. Yeah, I mean,
Speaker 1: I do think that it's uh fairly open secret that
Speaker 1: compromises sort of a dirt become a dirty word in
Speaker 1: in Washington. And that's sort of why we've seen a
Speaker 1: lot of these, you know, initiatives and sort of promises
Speaker 1: that were made coming into uh the year not really
Speaker 1: come to pass, whether that's tax reform, whether that's healthcare legislation,
Speaker 1: or whether that's infrastructure spending. And that's something that the
Speaker 1: markets have to take notice of because they moved tremendously
Speaker 1: in the back half of on these expectations that this
Speaker 1: time would be different, that with the GOP and control
Speaker 1: of the House, the Senate, and the White House, that
Speaker 1: things would get done. And yet here we are, same old,
Speaker 1: same old, And you know, the debt ceiling is just
Speaker 1: another manifestation of that. What is the current drop dead
Speaker 1: dit the diate by which this absolutely has to happen,
Speaker 1: all the US is at risk of not paying its bills. Well,
Speaker 1: there's actually a little bit of a debate on that um.
Speaker 1: In a letter to Speaker of the House, Paul Ryan
Speaker 1: Uh Treasury Secretary Manustion said, you know, September nine, visit um.
Speaker 1: There was a Congressional Budget Office report published at the
Speaker 1: end of June that says it's probably early to mid October.
Speaker 1: Wall Street analysts have sort of suggested it's going to
Speaker 1: be the second week of October. So the jury is
Speaker 1: still really out on that. And you know, right now
Speaker 1: the bill market is saying it's probably somewhere around October twelve.
Speaker 1: That's where they're concern lies at the moment. Well, if
Speaker 1: this standoff really intensifies and really becomes something critical, we'll
Speaker 1: have you back on the show. I hope you'll forgive
Speaker 1: me for saying I hope we don't have to have
Speaker 1: you back on the show. Benchmark will be back next
Speaker 1: week and until then, you can find us on the
Speaker 1: Bloomberg Terminal, Bloomberg dot Com, our Bloomberg app, as well
Speaker 1: as Apple Podcasts, Pocketcasts, and Stitcher. Why you're there, take
Speaker 1: a minute, rate and review the show so more listeners
Speaker 1: can find us and let us know what you thought
Speaker 1: of it. You can follow me on Twitter at Moss
Speaker 1: Underscore Echo, and you can get Brian at at beach Padder.
Speaker 1: Benchmark is produced by Sarah Pattison. The head of Bloomberg
Speaker 1: Podcast is Alec McCabe. See you next week. Four