Market Wire: Treasury Secretary Janet Yellen warns US could default as soon as June 1 without debt ceiling deal
Treasury Secretary Janet Yellen has warned that the US government could run out of money to pay its bills as soon as June 1 if Congress and the president fail to raise the debt ceiling. The warning—which comes after a number of policy bodies and large institutions had estimated an “x-date” closer to mid-July—puts Democrats and Republicans on a shorter negotiation timeline, and could lead to another round of brinkmanship against an increasingly-fragile economic backdrop. In a letter to House Speaker Kevin McCarthy, Yellen said “After reviewing recent federal tax receipts, our best estimate is that we will be unable to continue to satisfy all of the government’s obligations by early June, and potentially as early as June 1, if Congress does not raise or suspend the debt limit before that time”. In a pattern familiar to political observers, House Republicans approved a bill last week that would temporarily lift the limit in exchange for a series of spending cuts and legislative rollbacks - actions that Democrats in the Senate and the executive have vowed to oppose and veto. This comes after administrations from both parties have presided over massive spending increases, and after a long series of debt ceiling negotiations have failed to stop fiscal creep. Stress is emerging in government bond markets, where instruments that expire around the debt ceiling deadline are exhibiting unusual price behaviour, and in credit default swaps - where the price for insurance against a US failure to pay has risen sharply (albeit amid rate changes that have distorted market function). But the warning has not had a visible impact on currency markets thus far, where liquidity squeezes around prior debt ceiling impasses have led to increased volatility - and often, increased demand for the dollar. Markets are facing a “boy who cried wolf” problem. Apocalyptic warnings ahead of prior debt ceiling debates have come to naught, and - rightly or wrongly - investors think the same sequence of events will play out this time. But the risk of miscalculation - and room for serious doubt to emerge - remains significant.
We think it’s wise to brace for renewed volatility in coming weeks, and would warn that the dollar's proximity to the epicentre won't dissuade buyers in the event of a more widespread liquidity crunch.