Divyang Shah, IFR Senior Strategist
There could be a desire to reach an agreement before the Columbus Day holiday next week on Monday Oct 14, as well as the recess between Oct 14-18 period (“State work period” in the Senate and “Constituent Work Week” in the House).
On Oct 17, the US Treasury will exhaust its borrowing authority but with cash balances expected to be around US$30bn the US could still continue to meet its obligations until Nov 1, when the Treasury will almost certainly be unable to meet expected payments of US$60bn without a higher debt ceiling.
The Democrats and Republicans could continue to play politics, extending the stalemate beyond Oct 17, which runs the risk of flirting with default. But a desire to avoid financial market uncertainty and dislocation could see an agreement this week with the US holiday/recess next week providing an opportunity to focus minds.
Beyond the inversion in the Treasury (1m-1y) and CDS (1y-5y) curves the broader market is largely unperturbed by the risks. Judging by the VIX index (which ended Friday below 17%) the market continues to believe that beyond the tough talk from both sides, an agreement will be eventually reached.
