Debt ceiling standoff in Washington may start to hurt issuance

Bonds

Cities and states may start to pause borrowing plans as the nation heads toward a breach of its debt limit as soon as next week.

“If the debt ceiling is not raised, it’s going to be a brave new world,” said David Womack, deputy director at New York City’s Office of Management and Budget. “It will come at us hard and fast and all we can do is be prepared for more volatility,” Womack said, speaking Monday at a panel at the Government Finance Officers Association’s annual conference in Portland, Oregon.

All eyes are on Washington as the White House and Republicans try to hammer out a deal to avoid the nation’s first default by breaching its $31.4 trillion debt limit as soon as June 1. After the two sides met again Wednesday, House Speaker Kevin McCarthy repeated that he’s optimistic a default can be avoided although “we are still far apart.”

“I’m hoping we can make progress,” McCarthy said. “We’re not going to default.”

The uncertainty is hanging over markets, with stocks, Treasuries and munis all weaker. Muni yields spiked higher by as much as 30 basis points last week, in part due to relatively high issuance. But as the impasse persists, issuers are expected to become more reluctant to bring deals to market amid the uncertainty.

Womack said New York City had planned to bring a refunding to market next week but now may pause the deal depending on what happens in Washington.

The standoff is already hurting short-term rates and delaying borrowing plans could dampen local economies, warned National League of Cities CEO and Executive Director Clarence E. Anthony.

“Short-term rates are already at significantly higher levels than in recent history. A default by the federal government would likely cause those rates to skyrocket temporarily, making it unfeasible for local governments to utilize short-term borrowing facilities,” Anthony said in a statement.

“Cities, towns and villages would have to delay or cancel many projects, such as bridges and sewer system upgrades, until interest rates return to normal. This would impact infrastructure projects and the jobs they create particularly hard, disrupting local economies, municipal budgets and much-needed infrastructure improvements in communities across the country.”

As the uncertainty continues, smaller issuers will tap the brakes on coming to market although large and more frequent issuers are forced to finance in good times and bad, Womack said.

“If you don’t have to come to market, you can just sit it out, but some of us in this room don’t have that luxury,” Womack said.

“As a refunding, we don’t have to do it right now [but] the new money [deals are] what I’m worried about because we can’t delay those too long or we will get out of sync with our capital needs.”

The state of Illinois, which sold $2.5 billion of bonds in April, timed the deal in part because it “recognized [the debt ceiling impasse] might be brewing,” said Paul Chatalas, the state’s director of capital markets, who spoke on the panel with Womack. “In the back of our minds we wanted to get ahead of it,” Chatalas said.

“If we were looking to issue anytime here on out, the key would be flexibility because we issue in good and bad markets,” he said. “When we need the funds, we need the funds. We can’t and shouldn’t try to time the market, but we can make nips and tucks if you have the flexibility.”

GFOA sent out an alert Monday recommending its members take “immediate action” in light of the Washington standoff.

Cities should review investment portfolios, and confirm holdings in U.S. Treasuries and the date these investments mature, the GFOA said.

Municipalities should also know if those investments are needed for obligations like debt payments, and should keep some cash in hand to meet obligations in case of a U.S. default.

Governments should also be aware of any escrows backed by U.S. Treasuries or State and Local Government Securities series, the association said.

If Washington fails to find a solution, “in the debt realm, it’s going to become very real very fast,” Chatalas said.

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