new york
CNN
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President Joe Biden and House Speaker Kevin McCarthy have finally reached a deal to avert the United States’ first-ever debt default — but you might want to hold your applause. There could be an even more dramatic second act to the debt ceiling drama.
This is the reason.
House of Representatives A vote on the bill is set for Wednesday, less than a week before June 5. If the House passes the bill as proposed, it must be approved by the Senate and sent to Biden to be signed into law.
It’s a very tight timeline and puts a lot of pressure on the leadership of both parties.
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Credit rating agencies could downgrade the U.S. debt if people lose confidence in the country’s ability to pay its debt on time, even if the bill passes a deadline to avoid rejection.
In the year That’s what caused the US debt to decline for the first time in 2011.
Three days after lawmakers signed the deal, Standard & Poor’s downgraded U.S. debt from its coveted AAA rating amid months of wrangling among lawmakers over the country’s inability to repay its debt. That sent markets much lower.
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At this time, Fitch, one of the top credit rating agencies, has already put the US debt in a negative rating.
“The ratings reflect the political bias that will hinder a decision to raise or end the negative debt limit on a fast x day[when the US Treasury exhausts its financial resources and ability to take extraordinary measures without incurring new debt],” the company said in a statement last week, before McCarthy and Biden reached an agreement. .
As of Wednesday, the other two major sovereign debt credit agencies, S&P and Moody’s, did not put U.S. debt on hold.
If Fitch downgrades U.S. debt, it could raise yields on Treasury notes, underscoring the risks associated with holding U.S. debt. Because banks and other lenders often base interest rates on U.S. bond yields, that raises borrowing costs.
However, after S&P downgraded U.S. debt in 2011, the opposite happened—investors shut down and bought more bonds, driving yields lower.
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The exterior of the US Treasury Building is seen on March 13, 2023 in Washington, DC.
Assuming a deal to raise the debt limit passes before X date, the Treasury Department will have to issue more bonds to replenish the money it burned during special measures when it can’t borrow more money. This period began after the debt ceiling was first breached in mid-January.
The agency announced on the Treasury’s auction site that it plans to sell $114 billion in short-term bonds in the coming days, and is expected to pay high yields to bidders to meet the demand.
According to Michael Reynolds, vice president of investment strategy at Glenmead, this creates more competition for equity investors. After weighing their options, many investors may find investing in U.S. Treasuries better than stocks. That will take some of the cash flow out of the stock market for the time being, he said.
In addition, the new issue “continues to strengthen economic conditions and raise front-end production in the near term,” said George Catrambone, head of US fixed income at DWS Group. The Treasury will also announce large-scale auctions with updated maturity schedules, he added.
“All of this may increase volatility, widen spreads, but ultimately the market will continue to offer real alternatives to the equity and low bond yields it is used to.”
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