Investors are worried about the debt ceiling debate in Washington. Stocks have wobbled all week, halting their recent A.I.-induced rally, and yields on one-month Treasury billswhich mature around the time the government could default on its debts in Junetopped 5.6% Wednesday, the highest level since before the Global Financial Crisis in 2007.
Its a sign that traders are shunning government bonds owing to serious concerns about a potential U.S. debt default. Treasury Secretary Janet Yellen has warned that as soon as June 1, the so-called X date, the U.S. government could run out of money and economic catastrophe may follow. But Libby Cantrill, a managing director and head of public policy at Pimco, still believes lawmakers will make a deal and avoid that worst-case scenario.
It is our viewwith high convictionthat the recent on-and-off and now on-again negotiations will result in a debt ceiling deal ahead of the U.S. Treasurys X date on June 1, she wrote in a Tuesday article, the Financial Times first reported.
Cantrill argued that making concessions for an agreement might not be politically advantageous for lawmakers, and could lead to a last-minute agreement, but neither side has any political incentive to default. That means even if there is last-minute drama, eventually a debt ceiling deal will pass.
To use an apt, albeit graphic analogy: Passing the debt ceiling is like passing a kidney stonewe know it will pass, it is just a question of how painful it will be. We would assert we are in the painful period right now, she wrote.
Cantrills view is a common one on Wall Street and among the worlds top economists, despite recent signs of investors default fears in the stock and bond markets. Jeremy Siegel, a professor at the University of Pennsylvanias Wharton School, even argued in his WisdomTree commentary this week that there is zero chance the debt issue will not get resolved, even though there will be posturing and debate right up to the last minute.
Still, lawmakers are butting heads over a number of issues and havent made much progress. On Wednesday, House Speaker Kevin McCarthy told reporters at a news conference that negotiations with the Biden administration had stalled owing to disagreements over the GOPs proposed spending cuts.
Im sending our negotiation team down to the White House to try to finish up the negotiations, he said. The off ramp here is to solve the problemspend less than we spent last year. Thats not that difficult.
Rep. Garret Graves, a Republican from Louisiana who is a negotiator in the talks, said the White House wants to maintain its current spending levels, but Republicans have made it clear that thats a nonstarter.
Democrats, who had previously objected to Republicans push for work requirements for federal assistance programs, shot back after the press conference Wednesday. House Minority Leader Hakeem Jeffries argued the GOPs spending cuts were draconian, the Wall Street Journal reported. And White House press secretary Karine Jean-Pierre added that there are multiple extreme proposalsincluding more under-the-radar issues like energy-permitting reform for both traditional and clean energy and changes to how Medicare reimburses providersthat the administration feels would hurt every single part of the country.
Despite the conflict, McCarthy said that he still hopes to make progress in negotiations this week, adding: Were not going to default.
