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Tax Day Receipts Crucial in the Face of a Potential Debt Ceiling Default

S.J. Steinhardt
Published Date:
Apr 17, 2023


Tax Day is Tuesday, and this year, the stakes are higher than in most, as the Treasury’s ultimate haul will have implications for the nation’s ability to meet its debt obligations, Accounting Today reported.

As Congress debates raising the debt ceiling from its current $31.4 trillion, the tax receipts from the 2022 filing season will determine how much cash the Treasury Department has on hand to pay the nation’s outstanding bills. The money due to the government on April 18 will be reflected in the Treasury’s cash holdings soon, but the issue remains as to whether those receipts will be enough until June 15, when there will be another influx of tax money from installment payments being made.

"We maintain our current base case for a mid-August X-date [when the government will no longer be able to borrow] but see risks skewed toward earlier," Bank of America analysts Mark Cabana and Katie Craig wrote in a note to clients, Accounting Today reported. They wrote that an increase of more than $200 billion in the Treasury Department's holdings after Tax Day would be strong, while a figure of less than $150 billion would be weak. 

While Bloomberg reported that House Speaker Kevin McCarthy (R-Calif.) recently proposed a one-year debt limit suspension, he still wants to use the situation to extract spending cuts and other concessions from the Biden Administration, and market observers remained concerned about many issues stemming from the standoff. Among them are the following:

● Bill curve dislocations. This refers to a situation in which investors may demand higher yields on securities that are due to be repaid shortly after the United States runs out of borrowing capacity. That would happen because the government would be unable to to sell fresh securities and obtain cash to repay holders. Currently, there are small dislocations around various maturities, but if a clear distortion does emerge, that could indicate a problem;

● Relative yields. As investors move away from certain more vulnerable securities, alternatives linked to less risky dates would be in greater demand. The absolute yields on these shorter bills have moved up along with the rest of the curve, but the rate they offer has declined relative to overnight index swaps;

● Auction demand. As investors may prefer certain bill maturities and be unwilling to hold paper maturing around riskier dates, they may change their behavior at regular government debt sales. The recent preference has been for shorter maturities;

● Insuring against default. Accounting Today noted that one key market to watch is what happens in credit default swaps for the U.S. government, reporting that there was a significant increase in activity in recent months, implying a higher probability of default;

● Dwindling government cash. Accounting today noted that the approaching debt limit could result in the Treasury Department drawing down the amount of its ready cash, as officials avoid borrowing excess money that's not needed right away.

The cash on hand was around $99 billion last Thursday and as low as $87 billion, the smallest amount since December 2021, last Wednesday. That amount can shift by tens of billions of dollars on a single day, and it was above half a trillion as recently as February.

That's why the amount that Treasury collects on Tax Day is so critical, Accounting Today explained. If it's enough to last Treasury  through June 15, when some taxpayers will pay their next installment of estimated taxes, then it's also likely to bridge the gap to the next available extraordinary measures on June 30 and avert default until later in the summer—or even later if receipts are large. On the other hand if the revenues are not that large, then the government might not even make it to June 15, and there will be very little time to come to a legislative solution.