This short summary by Moody’s help place the current debate into logistical context.

  • “There is no direct connection between the debt limit and a default,” says Moody’s Steven Hess, believing the government would continue to service its borrowings even if the debt ceiling isn’t raised by the Oct. 17 deadline. The debt limit, he notes, restricts government expenditures to the amount of incoming revenues – it does not prohibit servicing existing debt or issuing new paper to replace maturing debt.
  • Interest could be a different story, and technically is an expense the Treasury could decide not to pay. Even still, the first interest payment isn’t due until October 31, and it’s a relatively small $5.9B. Mid-November’s payment is $30.9B.

We still believe that if it is not raised at least initially risk premiums across credit products might widen and possibly with less net debt, there could be a bid for Treasuries and Mortgage Backed Securities as the Fed would be buying the same amount of a lesser total since they decided not to taper.

Tom Koehler