How a Default Could Unfold
More precisely, the new cash being borrowed is slightly larger than the amount coming due. The Treasury borrowed $120 billion this week across the three different notes. While roughly $150 billion of debt comes due on May 31, around $60 billion of this is held by the government from past crisis interventions in the market, meaning it sort of ends up paying itself on this portion of the debt, leaving $30 billion of extra cash, according to analysts at TD Securities.
Some of that could go to the $12 billion of interest payments that the Treasury also has to pay that day. But as time goes on, and the debt limit becomes harder to avoid, the Treasury may have to postpone any incremental fund-raising, as it did during the debt limit standoff in 2015.
After the X-Date, Before Default
The U.S. Treasury pays its debts through a federal payments system called Fedwire. Big banks hold accounts at Fedwire, and the Treasury credits those accounts with payments on its debt. These banks then pass the payments through the market’s plumbing and via clearing houses, like the Fixed Income Clearing Corporation, with the cash eventually landing in the accounts of holders from domestic retirees to foreign central banks.
The Treasury could try and push off default by extending the maturity of debt coming due. Because of the way Fedwire is set up, in the unlikely event that the Treasury chooses to push out the maturity of its debt, it would need to do so before 10 p.m. at the latest on the day before the debt matures, according to contingency plans laid out by the trade group Securities Industry and Financial Markets Association, or SIFMA. The group expects that if this is done, the maturity will be extended for only one day at a time.
Investors are more nervous that should the government exhaust its available cash, it could miss an interest payment on its other debt. The first big test of that will come on June 15, when interest payments on notes and bonds with an original maturity of more than a year come due.
Moody’s, the rating agency, has said that it is most concerned about June 15 as the possible day the government could default. However, it may be helped by corporate taxes flowing into its coffers next month.
The Treasury can’t delay an interest payment without default, according to SIFMA, but it could notify Fedwire by 7:30 a.m. that the payment will not be ready for the morning. It would then have until 4:30 p.m. to make the payment and avoid default.