The Cost of the Debt Ceiling Fight

David R. Kotok
Tue May 23, 2023

“One-month Treasury yields remain stubbornly above the current Fed Funds rate, at 5.53 percent versus 5.08 pct. As we have mentioned previously, this is a very unusual occurrence. From 2002 to 2022, 1-month yields averaged 0.13 percentage points lower than Fed Funds, with a standard deviation of 0.22 points. Today’s difference is 2.6 standard deviations from that mean.”  (Source: Nicholas Colas and Jessica Rabe’s excellent Datatrek Morning Briefing for May 22. See to subscribe.)
Some clients and readers say, “They won’t default; what’s the big deal?" Well, here it is.


The Cost of the Debt Ceiling Fight

1. The cost of the debt ceiling fight is being incurred NOW! Datatrek cites one example. Translation: 58 basis points of additional interest cost incurred by the United States on one month’s worth of T-bills (about $300 billion). For some folks that’s a lot of money. 
2. Every municipal financing escrow and the current lack of special SLGS is impacting the entire $4 trillion Muni market.
3. Every money market fund pricing is impacted.
4. Every bank in the United States must compete for deposits (a precious thing, as we well know) while T-bills sap the cash flows from would-be depositors.
5. Uncertainty premia are higher than normal and impossible to measure.
6. Small and independent businesses are making decisions to delay activity because of the unknown political outcome.
We’ll stop. The debt ceiling fight is now costing the United States billions.
Why? To preserve a relic in the law that originated in 1917 with the financing of World War I. To use political pressure instead of budget negotiations and the annual budget process. To threaten to sink one political party or the other by putting political power ahead of the interests of the country.   
C’mon, this is really getting stupid. And it is already expensive and getting more so. 

David R. Kotok
Chairman & Chief Investment Officer
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