- Congress returns from Washington facing deadlocked pandemic relief bill and Oct 1 government shutdown
- U.S. JOLTS job openings expected to lose a little ground after 2-month recovery
- 10-year T-note auction
Congress returns from Washington facing deadlocked pandemic relief bill and Oct 1 government shutdown — Congress returns to Washington this week facing big issues such as the deadlocked pandemic relief bill and the need for a government spending bill to prevent another government shutdown on October 1. The Senate returned to Washington this week. The full House is not due to resume its sessions until next week, but House committees will be meeting this week.
The markets are waiting for any sign of progress on the deadlocked pandemic relief bill. Democrats are demanding a bill of at least $2.2 trillion, while the Republicans are willing to go no higher than $1.3 trillion. The main areas of contention are (1) the amount of federal aid to state and local governments, (2) the size of an unemployment bonus with the Democrats at $600 per week and the Republicans ar $300 or $400, (3) whether there will be a second stimulus payment to individuals, (4) the size of Post Office aid, and (5) Senate McConnell’s demand for a Covid liability shield.
Speaker Pelosi has repelled Republican attempts to promote a so-called skinny bill that deals with only the unemployment bonus, a second round of PPP funding, and a few other items. A pandemic bill could be caught up in shutdown politics since the must-pass continuing resolution could be used as leverage for the pandemic bill, although Pelosi-Mnuchin last week pledged to pass a clean continuing resolution.
Congress must approve a spending bill by the time the new fiscal year starts on October 1, or there will be another government shutdown. Congress has not passed any of the necessary spending bills for fiscal 2021 spending. The consensus is that Congress by late September will pass a continuing resolution (CR) that lasts until after the November 3 election. That continuing resolution would simply roll-over spending at current levels, thus avoiding a new partisan battle over spending amounts and priorities. The consensus thinking is that neither the Republicans nor the Democrats want to be blamed for a government shutdown so close to the election, meaning there is a strong incentive in Washington to pass a CR and kick the can past the election.
Meanwhile, the Treasury market has been called upon to finance the massive new spending caused by the pandemic, as well as the chronic long-term budget deficit caused by the inability of current tax receipts to cover the government’s spending level.
The U.S. national debt has soared by $3.1 trillion (+13%) just since the pandemic began in February to a record high of $26.6 trillion. The national debt has now risen by $6.7 trillion since President Trump took office in January 2017. The national debt has more than tripled and increased by $17 trillion since 2006 when the Great Recession and now the pandemic sent government spending through the roof and tax revenues were reduced by the 2018 tax cut.
The Bipartisan Policy Center is forecasting that the FY2020 budget deficit will total $3.7 trillion when the fiscal-year ends on September 30, 2020. That is more than triple the the FY2019 deficit of about $1 trillion. Moreover, Congress may agree on another pandemic relief bill of $1-2 trillion, which would push the deficit even higher in coming months.
Congress in August 2019 passed a bill that suspended the debt limit for two years. However, the debt limit will be automatically reinstated on August 1, 2021 at whatever debt level exists at that time. The Treasury will then be able to use its usual emergency measures to stave off the X-date until roughly autumn 2021.
If Congress does not raise or suspend the debt limit by the X-date, then the Treasury will run out of cash and will start defaulting on some of its payment obligations because it will no longer be able to borrow any money. It remains unclear whether the Treasury would be able to pick and choose which payments it makes, thus perhaps avoiding a sovereign debt default on Treasury securities for some additional period of time.
U.S. JOLTS job openings expected to lose a little ground after 2-month recovery — The consensus is for today’s July JOLTS job openings report to show a decline of -111,000 giving back part of June’s +518,000 increase to 5.889 million. Job openings plunged by a total of 1.631 million during Feb-April to a 5-year low of 4.996 million in April. Job openings in May-June have so far recovered only 893,000 of that decline. An increase in job openings of another +1.123 million would be necessary to bring job openings back to the pre-pandemic level of 7.012 million seen in January.
10-year T-note auction — The Treasury today will auction $35 billion of 10-year T-notes in the first of two reopenings of the 5/8% 10-year T-note of Aug 2030 that the Treasury first sold in August. The size of today’s $35 billion 10-year T-note auction is up sharply from the Treasury’s last 10-year reopenings of $29 billion seen in June and July. The Treasury will then conclude this week’s coupon package by selling $23 billion 30-year T-bonds on Thursday.
The 12-auction averages for the 10-year T-note are as follows: 2.47 bid cover ratio, $7 million in non-competitive bids, 5.2 bp tail to the median yield, 48.1 bp tail to the low yield, and 53% taken at the high yield. The 10-year is moderately below average in popularity among foreign investors are central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of only 60.8% of the last twelve 10-year T-note auctions, which is moderately below the median of 63.4% for all recent Treasury coupon auctions.