IRS refund delays could force changes in Treasury bill supply

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As the U.S. government shutdown continues, one potential consequence of it threatens to disrupt the supply of Treasury bills.

Assuming that no agreement is reached to extend the suspension of the debt ceiling, which ends March 1 and is a distinct issue from the current shutdown, the Treasury Department will need to reduce its cash hoard to about $200 billion, where it stood in February 2018, from about $385 billion. If refunds to taxpayers are delayed when the tax filing season begins Jan. 28, that money will remain in the Treasury’s coffers, possibly forcing the government to issue fewer bills to avoid accumulating cash.

While the IRS has said that refunds will be processed despite the shutdown, a Washington Post report that hundreds of the agency’s employees have received permission to skip work has bond market strategists contemplating the possible consequences.

“The fact that not even all recalled IRS employees are showing up the office emphasizes that the refund delay risk is increasingly likely,” said Jonathan Cohn, the head of interest-rate trading strategy at Credit Suisse in New York. The current size of the cash balance “tells me that they’ll have to issue fewer bills than they would have previously.”

Assuming stable demand, lower bill supply would put downward pressure on U.S. short-term market rates.

Once the debt limit suspension ends on March 1, the Treasury is expected to deploy extraordinary funding measures to keep the cash spigot open for as long as possible, as it’s done in the past. That should allow the government to pay its bills until August or September, although that forecast is “written in very light pencil,” NatWest analysts wrote in a note published Wednesday.

The shutdown could complicate that situation, too.

“If the shutdown lasts through March 1, the Treasury’s accrued refund liability will eat into the available resources and eat into extraordinary measures,” Cohn said. “The question then becomes whether they’ll be able to manage the April tax deadline.”

Bloomberg News
Tax refunds Treasury bonds Government shutdown Treasury Department IRS