<START> A debt ceiling timeline (of sorts), and other stuff A cut out and keep chart from Nomura (click to expand): Timelines are handy. So are specific dates, especially if avoiding catastrophe. And the FT's James Politi made a solid point in Friday's FT that we think deserves attention (our emphasis): Now the problem with such "uncertainty" is that leaves bickering lawmakers ignorant of which last minute to aim for: Indeed the essential (and horrifying) report from the Bipartisan Policy Center pegs the start of the range at February 15th. Unlike the earlier debt ceiling battle, this one will have to be waged without the concentrating presence of a hard-ish deadline. While you ponder that uncomfortable point, here's some scenario modelling from Nomura that you can probably throw away once "uncertainty" becomes "oops, that happened..." As for potential market reactions as time without a deal passes, we've come across two research notes that make points worth highlighting. 1) The first note is by RBC, which starts with an interesting technical note explaining the fluctuations in repo markets throughout the last debt ceiling fight: In 2011, the debt ceiling caused Treasury supply to drop and a flight-to quality into Treasuryonly money funds, driving financing rates lower in June and most of July. However as August 2nd, the day that the Treasury specified as its drop dead date, approached a couple of money market funds determined that they were not legally allowed to accept defaulted securities as collateral on a repo. There seems to be no cross-default on Treasury securities (we are not lawyers, so check your own council on this issue), so the money funds could in theory accept Treasuries that have not missed a payment. However, most repo systems do not have the operational ability to ensure that specific CUSIPs are not accepted as collateral- this is not a normal requirement. Because money funds could not guarantee that no defaulted Treasuries would be accepted as collateral, they stopped doing Treasury repo altogether. Once other money funds saw these funds pull back, their lawyers looked at the issue and they pulled away from the market. Accordingly, financing rates soared until the debt ceiling was raised. And absent a deal, the strategists actually expect rates to climb higher and faster this time round, for two reasons: First, the issue is now known among all the money funds, so we would expect an abrupt exodus from broader range of funds. With money fund reform underway, funds that might otherwise consider an aggressive legal position are likely to err on the side of caution and simply walk away. Second, the odds of massive use of the 7-day put are high, so many dealers who thought they had locked up their financing are likely to find that nothing was actually locked up. Around the debt ceiling a term repo with a non-money fund is a term repo, while a term repo with a money fund may or may not be a term repo. Dealers may be surprised that they face a significant funding mismatch. The 7-day put: Money funds are limited in their illiquid asset holdings, with the definition of liquidity being determined in part by the ability to get multiple bids on that asset. Because a term RP can only be unwound with the originally counterparty, normal term repo counts as an illiquid asset. To give term repo liquid asset status, dealers typically offer the 2a-7 fund the right to break any repo with seven days notice. This option is priced as if it was a liquidity option only to be used if the fund faces massive withdrawals, and money funds have been extremely reluctant to exercise the option in any other circumstance. Accordingly, the only time we have seen 7-day puts being used was during the crisis when money funds were facing massive outflows. However, given the legal issues around the debt ceiling, we would not be surprised to see a money fund argue that they have a responsibility to get out of Treasury repo prior to a potential default. And if one money fund exercised their puts, pressure on other money funds to follow would intensify dramatically. 2) The other note is by Citi's FX strategist Steven Englander, who expects that asset markets "are likely to ignore the debt ceiling till the last minute, or even later, and then react on panic if it gets breached." Though as we just explained, this time round it may be difficult to recognise the last minute until there are only seconds left. More from Englander: The reason is that the past three fiscal driven sell-offs have had increasingly little market impact. The July 2011 debt ceiling crises + downgrade led to more than 15% drop in US equities (Figure 1, note that EUR was well north of 1.40 till late in August, so this wasn't a manifestation of the euro crisis). Right after the November 2012 election we had a bout of fiscal cliff worries that gave us a 5% correction, but when talks broke down in late December, equities barely budged. We suspect investors in FX and other markets have become conditioned to last minute resolutions to US fiscal crises and are increasingly jaded with respect to the political process that will generate the solutions. Hence the tendency will be to hold on to risk even longer on the view that "don't worry, something will turn up," just as it has in the past. We think this means that 1) risk will sell off less approaching the debt ceiling deadline; 2) currency investors will hold on to risk in spot but buy tail risk hedges; and 3) there will be a wholesale cutting of positions in FX and other asset classes, if the debt ceiling is breached. So it may looks as if the debt ceiling breach is not worrying asset markets, but it means that investors are banking on the chestnuts being pulled out of the fire. If they are not pulled out, positions go up in smoke. By David Keohane and Cardiff Garcia Related links: US debt talks complicated by timing - FT Debt ceilings and downgrades - who cares? - FT