Like most business people, Sarah Spoja expects the nation’s political leaders to work out a deal to prevent the government from defaulting on its debt. But that doesn’t mean she is willing to bet a couple hundred million dollars on it.
As Washington draws closer to hitting the federal debt ceiling, the risks of a business-as-usual approach for companies like Tipalti are growing. If Congress does not raise the government’s borrowing limit soon, markets for stocks, bonds and currencies could go haywire, making the government’s financial issues a problem for business, too.
To avoid unknown dangers, Spoja recently moved Tipalti’s funds out of short-term Treasury bills that will mature around the June 1 date when the government may run out of cash. She has switched from corporate bonds to safer money market funds, even though they pay a lower return. And she’s stockpiled enough cash — in five currencies — to cover two months of payroll.
“For the folks that are responsible for managing a company’s cash and making sure they have the right investment policies, the last six months have been really challenging,” she said. “The debt ceiling crisis and the uncertainty right now — it’s just one more thing that CFOs are dealing with.”
Spoja’s strategy illustrates how even the prospect of a government default is already shaping business and financial market decisions. As time runs short for President Biden and House Speaker Kevin McCarthy (R-Calif.) to reach a deal, some investors are trying to protect themselves against a potential cataclysm and others see an opportunity to profit — whether a default happens or is avoided at the last minute.
Since the United States has never defaulted on its debt, no one knows exactly how bad the financial carnage would be if it did. But many executives — with millions or billions of dollars at stake — are not waiting to find out.
Managers of money market mutual funds are shunning short-term Treasury bills, normally one of their standard investments. The funds’ absence is especially notable since they have recently experienced strong inflows from depositors fleeing low interest rates at banks.
Hedge funds are buying insurance on government debt, which would provide a big payday if the government misses a scheduled payment. And prominent corporations such as Apple, Merck and ConocoPhillips are rushing to raise money before the debt ceiling standoff upends routine bond market operations.
Executives at JPMorgan Chase, the nation’s largest bank, meet every day in a dedicated “war room,” CEO Jamie Dimon told Bloomberg earlier this week. If no agreement is struck as the deadline approaches, they could meet up to three times per day.
“There’s actual investor nervousness about the risk of default,” said Priya Misra, head of global rates strategy for TD Securities. “The private sector is doing a lot of hoping and praying that somebody blinks.”
If Congress does not raise the $31.4 trillion debt ceiling, the Treasury Department soon will be unable to pay the nation’s bills. Treasury Secretary Janet L. Yellen said earlier this month that could happen “potentially as early as June 1.”
On Friday, the Congressional Budget Office said there is a “significant risk” the government will exhaust its spending ability in the first half of June.
Fearing unpredictable trading next month, corporations are accelerating their efforts to raise cash from investors. Through Thursday, investment-grade corporate bond issuance in May totaled nearly $64 billion.
In just nine trading sessions, companies raised almost as much as in the entire month of April. Junk bond sales also are running above last month’s pace.
Merck, which declined to comment, raised $6 billion, Apple brought in $5.25 billion and Estée Lauder netted $2 billion. Apple and Estee Lauder did not respond to a request for comment.
The stakes of the debt ceiling fight are so monumental because of the role that Treasury securities play in global finance. Investors regard U.S. government bonds, bills and notes as “risk-free” assets. The price of everything else, such as stocks, corporate bonds and debt issued by other governments, is set in relation to that of Treasurys.
A default would expose Treasurys as riskier than investors have assumed. But how much riskier would not be clear for some time, leaving investors uncertain about the price of everything they own.
That scenario is so dangerous that most financial market participants and business executives expect politicians to compromise, as they have in previous showdowns. The stock market so far has shown little sign of concern.
“We know how this is going to end. There’ll be a resolution just before midnight; that’s the general view,” said Jack McCullough, president of the CFO Leadership Council, a professional association.
For corporate finance executives like Spoja, the standoff over the debt ceiling is just the latest headache. The Federal Reserve has been raising interest rates at their fastest pace in four decades, which both slowed the economy and contributed to the failure of several regional banks.
At Tipalti, in Foster City, Calif., debt ceiling concerns have underscored the need to reduce risk and build liquidity. The company derives its name from a Hebrew expression meaning “I handled it,” which is precisely what Spoja, as CFO, is trying to do.
About 60 percent of the company’s 1,000-plus employees work outside the United States. Payroll is distributed in U.S. and Canadian dollars, euros, British pounds and Israeli shekels.
The company’s short-term accounts can reach “hundreds of millions” of dollars, she said.
Spoja usually converts dollars into other currencies on the spot market when it is time to issue paychecks. But now she’s accumulated a two-month currency cushion that will allow her to avoid the foreign-exchange market while the politicians bluster and bargain.
“I just don’t want to be doing payroll runs around June first,” she said.
Normally, Spoja would invest some of the company’s available cash in top-quality, short-term corporate bonds, including those issued by several banks.
But with so much uncertainty about how markets will look over the next 30 days, and the banks looking so unsettled, she has moved into money market funds instead. Though those pay a slightly smaller return, it is easier to move in and out of money funds, making it less likely that Tipalti could be trapped if markets freeze.
Jerry Klein has the other side of that trade.
As head of the corporate cash management group for Treasury Partners in New York, Klein manages the short-term cash needs of customers that include venture capital-backed start-ups and Fortune 500 giants.
Their accounts range in size from about $50 million up to $1 billion each and are invested in institutional money market funds, insured bank deposits and bond portfolios. Many clients have contacted Klein to ask if they should run for cover.
Some investors already have. As they dumped one-month Treasury bills that will mature in early June, prices on those securities sank while their yields rose (bond prices and yields move in opposite directions.)
One-month T-bills maturing around the date when the government could run out of cash offer yields around 5.5 percent — roughly 0.3 percentage points higher than three-month bills. That may not sound like much. But it’s an unusually wide positive gap for these type of instruments. On every $1 million, the higher yield would translate into an extra $3,000 in yearly interest.
“We actually think these bills are good value right now,” Klein said. “U.S. Treasurys are still the safest investment in the world.”
Treasury Partners assumes the debt ceiling struggle will be resolved before the United States fails to make a debt payment. In the worst case, the government might stumble into a “technical default” by paying one or two days late, while politicians scramble to reach a deal, he said. In that case, investors would eventually receive what they are owed, Klein said.
He is not alone in spying opportunity amid the political squabbling. Investors are buying insurance against a U.S. default, known as a credit default swap, pushing the price of such protection to its highest level since the 2011 crisis.
Insuring $10,000 of Treasurys against default for one year costs about $174, more than 10 times what it cost in January, according to S&P Global Market Intelligence.
“Hedge funds are buying a lottery ticket,” said Mark Zandi, chief economist for Moody’s Analytics. “It doesn’t cost much to buy it and you get a big payment if you win.”
Others caution against getting too clever. Tony Roth, chief investment officer for Wilmington Trust, which manages $100 billion in assets, sees little chance for investors to trade profitably around the debt ceiling.
During an earlier debt showdown in 2011, the stock market fell about 15 percent before rallying. But picking the right moment to reinvest is not easy, meaning that investors who try to avoid a downdraft risk missing out on an eventual rebound.
“We have a small probability of a bad outcome,” Roth said. “But we have a large probability of a relief rally if nothing happens.”
On Wednesday evening, Tipalti’s Spoja attended a dinner with several other CFOs. All were mulling the same dilemma: It’s almost impossible to imagine the United States actually defaulting on a debt payment. But if it happens, the consequences will be calamitous.
Managing the finances of a growing company is tough enough. Charting a course through the current morass is testing the ability of corporate finance pros to assess political risk, market probabilities and the opportunity costs involved in choosing one approach rather than another.
“I grew up in Washington, so I feel like I’ve seen this before. I always look back at D.C. to make sure they’re not doing the wrong thing,” Spoja said. “A true default would hurt everyone.”