What Actually Happens Oct. 17th

Contrary to what the media will tell you, on October 17th the world will still spin if we don't have a deal. The Treasury will have $30B on hand on 10/17 and will have ~$100B on 10/31. Then Treasury will then pull in ~$150-$200B of tax receipts a month and have ~$25-30B in debt servicing payments per month. The tax receipts are enough to fund 2/3rds of the government. The key here is the prioritization of payments, Goldman had a good write-up on ZH yesterday.

Jack Lew has indicated that the Treasury doesn't have the technology in place to easily prioritize payments, although I don't know many people that believe him outside of the 'easily' part. The issue is also if there is an executive order for payment prioritization and the political issues that may arise from this.

The market is not pricing in a default, there have been articles on CDS but US CDS is very thinly traded and these traders are just looking for a quick gain, not to actually hedge Treasury positions. There have also been articles on the October T-bill rates going to ~18bps while November bills only at ~3bps. This is moreso funds that just really don't want the headache of answering client questions about this as well as avoiding potential short-term losses given that uncertainty continues to rise as the deadline looms. A better proxy would be looking at Treasuries paying coupons on 10/31 and 4/31. The spreads between these two are very minimal.

Long story short (short story long), there is a very, very, very small chance we will default even given no deal by 10/17. The only things that could cause a default are either a substantial drop in tax receipts which is possible given an extended shutdown, or we actually prioritize payments away from debt servicing. If the latter happens, that would literally be the biggest mistake in Washington history. It's really hard for me to fathom a forceful default.