The Treasury Department officially suspended the sale of State and Local Government Series securities at noon last Friday, perhaps minimizing the impact on the municipal bond market.
The Treasury action was one of several steps the department is expected to take to avoid reaching the $16.4 trillion debt limit.
About $4 billion to $17 billion of SLGS are issued each month and halting sales will avoid new issuances in debt that would count against the debt limit, Treasury Secretary Timothy Geithner told Congressional leaders last week in a letter.
The Nation was on scheduled to reach the debt limit on Dec. 31, but closing the SLGS window and taking other steps, such as instituting a debt issuance suspension period, which the Treasury did on Dec. 31, will postpone reaching the debt limit until the end of February, Geithner told the lawmakers.
Issuers often buy SLGS, rather than open-market Treasuries, for advance refunding escrow portfolios because they can be specially tailored to the bonds being refunded. With the SLGS, the issuer can ensure its investment yield will be below its bond yield so that it won’t run afoul of yield restriction requirements.
In commentary published in The Bond Buyer on Dec. 17, Sam Gruer and Matt Roggenburg, managing directors of the Millburn, N.J.-based advisory firm, Cityview Capital Solutions, LLC, warned that a sudden and unanticipated closure of the SLGS window by the Treasury could disrupt bond sales.
But Gruer said yesterday, that the Treasury’s timing probably minimized any disruption.
“The timing of the closing [of the SLGS window] was probably relatively uneventful because it happened on a Friday during a slow, holiday week,” Gruer said. “Refunding bonds sold that week would not likely have been impacted by the closing. But, nevertheless it will impact advance refundings going forward as SLGS will remain unavailable for the foreseeable future.”
Meanwhile, Timothy Geithner may leave the administration at the end of the month, before the next battle with Congress over the debt limit. His departure was reported by Bloomberg News.
A Treasury spokesperson would not confirm that, but said, “Secretary Geithner has previously stated that he plans to be at Treasury until around the inauguration. We do not plan to make any further announcements about the timing of the Secretary’s departure until after his successor is named.”
Sources say Jacob Lew, White House chief of staff. is most likely to be nominated to replace Geithner.
As former director of the Office of Management and Budget, Lew is very familiar with budget issues, but market sources said it does not matter who heads Treasury, the SLGS window will be closed until Congress and the administration can reach agreement on what to do about the debt limit.