(Original title: Tigers catch up to their heels! The United States reached the debt ceiling on Thursday and Wall Street prepared to hedge)
News from the Financial Associated Press, January 18 (edited by Ma Lan)U.S. Treasury Secretary Yellen said in a letter to House Speaker McCarthy on Friday that the U.S. government will reach the debt ceiling on January 19 and will take extraordinary measures, but these measures can only last for a limited time.
She also noted that the U.S. could default on its debt as early as June, and that the government is unlikely to exhaust its buffer of cash and extraordinary measures before early June, but there is considerable uncertainty about this forecast and lawmakers must Raise or suspend the debt ceiling as soon as possible.
Yellen’s warning also drew further reaction from Wall Street, where analysts have issued numerous reports assessing when the U.S. will actually default on its debt and how a default will affect different assets.
extraordinary measures
Congress authorized U.S. Treasury Secretary Janet Yellen to take a variety of extraordinary measures to prevent defaults, mainly behind-the-scenes accounting operations.
According to Yellen, it is expected to sell existing investments and suspend reinvestment in the Public Service Retirement and Disability Fund, the Postal Service Retirees Health Benefit Fund and the Federal Employees Retirement System Thrift Savings Plan government securities fund.
These funds are usually invested in specially issued treasury bonds, which are counted towards the government’s debt limit. Yellen’s pause on reinvestment would reduce the amount of outstanding debt subject to a cap and provide the federal government with some temporary funding to keep the government afloat.
Retirees will virtually not be affected, and once the debt ceiling battle is settled, the funds will all be replenished.
Steven Pressman, a professor of economics at The New School at the left-wing University of New York, said that these extraordinary measures are actually money owed by the government to itself. The only question is whether the debt ceiling dispute can be resolved.
Wall Street is starting to cry
A default in late summer and early fall is likely, Bank of America analysts wrote in a note this week. Goldman Sachs said it was more likely than at any time since 2011 that the government would not be able to repay its debt.
Some former administration officials and Wall Street observers have warned that the fallout from a government default could be huge. Since 2011, markets have gotten bigger and more complex, and an outright default could lead to a massive sell-off.
While the government has contingency plans for default, these experts believe there is no foolproof plan to avert disaster.
Daleep Singh, a former White House official and now chief global economist at PGIM Fixed Income, said the Treasury and the Fed have some options, but none of them pass the market’s “credibility test.” Financial markets may suffer the pain necessary to force lawmakers to reach a resolution.
Respond in advance
According to TD Securities, in the event of a default, people will sell risky assets such as stocks and may flock to buy Treasuries.
During the month of the debt standoff in 2011, stock prices fell and short-term U.S. government bonds quickly lost value, but 10-year yields moved lower, in part because investors still view them as a safe place to park cash.
Traders at BNP Paribas began sending investors the price of U.S. credit-default swaps as a reminder to hedge against the government’s failure to pay on time.
Such swaps are usually frowned upon because the risk of U.S. Treasury defaults has been low, but the price of the trade has risen steadily over the past six months, confirming market concerns about the debt ceiling.
Priya Misra, head of global rates strategy at TD, said that while the market is mulling the possibility of a debt-ceiling disaster, many still believe a compromise will eventually be reached, which she sees as dangerous.
She pointed out that although the current political situation is similar to that in 2011, the liquidity of the financial market is much worse than that of that year, and it is difficult to repeat the same script.