Congress is taking debt-ceiling negotiations uncomfortably near a vague, but fast-approaching deadline that is closely monitored by markets.
It’s not clear exactly when that deadline will arrive or exactly what will happen if it does. But from Wall Street to Washington there is fear that the fallout could be very bad.
Treasury Secretary Janet Yellen has warned the U.S. could hit its $31.4 trillion debt ceiling as soon as June 1, which would mean the U.S. government could potentially run out of cash if Congress fails to lift it.
“They’ve taken the wrong hostage here,” said Kelly. “If you’re going to take something hostage, take the overall budget hostage, not the debt ceiling.” Although possible, the probability of hitting the debt ceiling on June 1 is “pretty low,” he said. The Treasury may make it to mid-June, at which point it will receive quarterly tax payments that might see it through to the end of the month, when it could unlock more than $100 billion of “extraordinary measures” that potentially push the x-date to the second half of July, said Elliott.
“This would be a self-inflicted economic issue,” he said of consequences that would stem from the debt-ceiling being breached. But that means “there’s a limit to how bad it gets,” in his view. “If it gets bad, somebody will fix it,” he said. Treasurys are also put up as collateral in repurchase agreements, known as “repo,” which are used for short-term borrowing, said Dixon. A situation in which Treasurys were losing value because of a default could present a “nightmare scenario” in the repo market, he said. “Credit could seize up significantly.”
That’s what happened during the debt-ceiling drama in 2011, as the country then neared its X-date. Investors sought safety in the 10-year Treasury note TMUBMUSD10Y , driving down its yield as anxiety over the debt ceiling climbed, according to Sevens Report Research. “If, ahead of the X-date, we were to assess the risk of a default as having become more material,” said Fitch, the country’s AAA credit rating would probably be put on “rating watch negative” and “further rating action could be considered.”
Still, JPMorgan’s Kelly warned in May 1 note that “political posturing” could increase investor nervousness about the debt ceiling, with the potential for equity market volatility to rise.
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