The standoff over the debt ceiling is raising the prospect of default and sending yields on certain Treasury bills soaring.
Yields on securities maturing in early June soared on Thursday, with at-risk bills maturing on June 6 featuring yields above 7%. Yields for bills maturing on June 1 were up more than 1.1 percentage points, clocking in at about 6.9%. Yields for bills maturing throughout the entire month of June soared above 5% on Thursday.
STOCKS STAND TO SUFFER MASSIVE LOSSES IF DEBT DEAL ISN’T REACHED IN NEXT WEEK
The yields on the riskier bills are far higher than the yields on securities that mature on May 30, which were down nearly half of a percentage point and had yields of about 2.6%.
The higher yields are centered on the time that officials predict the U.S. will hit the so-called X-date, which is when the Treasury will exhaust its borrowing authority — those bills would be at risk of nonpayment, causing investors to avoid them.
Yellen set the X-date, a moving target, at June 1 — next Thursday. Other analysts have a broader range, with the Bipartisan Policy Center warning on Tuesday that the X-date might hit between June 2 and June 13. The fast-approaching deadline is adding further pressure on White House and congressional negotiators to reach an agreement to lift the $31.4 trillion debt ceiling.
Meanwhile, there is also beginning to be trouble in the stock market, which is expected to devolve into full-on chaos if negotiators fail to reach a deal. Stocks, as gauged by the Dow Jones Industrial Average, have closed out in the red the last four days in a row, although the declines have been modest given the gravity of the situation.
Those losses could accelerate, fast, as investors start to panic.
Phil Toews, CEO of Toews Asset Management, told the Washington Examiner on Wednesday that when stocks start posting bigger declines, investors who see that could begin to panic-sell, creating a sort of domino effect for even bigger losses.
“I think it looks a little bit like a cliff, where it’s risk-on and risk-off. So at this point, we’re close enough to the date where negative momentum could just suddenly accelerate, and sometimes negative momentum begets more negative momentum,” Toews said.
The coming deadline puts pressure on the White House and the Republican negotiating team led by House Speaker Kevin McCarthy (R-CA).
Turmoil in the markets could be intensified by a U.S. credit downgrade, which happened the last time the country got this close to default back in 2011. During that debt fight, S&P announced it was downgrading the country’s credit rating below AAA (outstanding) — something that had never happened before.
“The longer policymakers wait to address the debt limit, the more likely our economic fate will be determined by external actors,” said Shai Akabas, executive director of Bipartisan Policy Center’s Economic Policy Program. “Credit rating agencies, Treasury investors, and global financial markets aren’t going to wait around forever. Once things turn, the situation could deteriorate quickly and be hard to reverse, which would immediately and negatively impact American consumers and businesses.”
Notably, the government has not suffered a default in past debt ceiling disagreements. Still, the odds are far higher than in past debt ceiling battles.
JPMorgan Chase is assessing a very high 1 in 4 chance that the U.S. will hit the X-date without a deal, odds that it said are growing each day a deal isn’t made.
“We still think the most likely outcome is a deal signed into law before the X-date, though we see the odds of passing that date without an increase in the ceiling at around 25% and rising,” JPMorgan chief U.S. economist Michael Feroli said Wednesday in a note to clients.
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Still, there is a tremendous amount of political pressure on President Joe Biden and McCarthy to come to an agreement. Neither of the two wants a default, as it would not only wreak havoc on the economy but could spell grim prospects for their political futures.
“Nobody, most of all the country, would come out of that situation as a winner, and it would be historically damaging politically for anybody who was involved and should have been there to avoid the crisis,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.