Treasury Secretary Janet Yellen said that signs of market stress are now beginning to emerge as the federal government moves closer to running out of cash, and that the Biden administration’s focus is on completing a debt-limit deal rather than contingency planning for a default.
(Bloomberg) — Treasury Secretary Janet Yellen said that signs of market stress are now beginning to emerge as the federal government moves closer to running out of cash, and that the Biden administration’s focus is on completing a debt-limit deal rather than contingency planning for a default.
“We are committed to not having missed payments and raising the debt ceiling,” Yellen said Wednesday via video conference to an event in London. “We’re not involved in planning for what happens if there’s a default,” she added when asked whether the Treasury was engaged with major financial institutions in game-planning for such a scenario.
Investors have shown signs of increasing concern, with the S&P 500 Index of US stocks down 0.9% as of 11:11 a.m. in New York, after a 1.1% slump on Tuesday. In the Treasuries market, investors are demanding ever-higher premiums on bills that mature when the government is seen most at risk of default. Rates on securities due June 1 and June 6 surpassed 6%.
The VIX index, a measure of expected volatility in stocks — often called the fear gauge — jumped after a prolonged period of calm.
“One of the concerns I have is that, even in the run-up to an agreement — when one does occur — there can be substantial financial-market distress,” Yellen said. “We’re seeing just the beginnings of it.”
The Treasury chief also reiterated that her department may run out of cash to pay the nation’s bills as soon as June 1.
Read more: Debt-Limit Doomsday Clock: What June Looks Like for US Treasury
“It’s highly likely that we would run out of resources to meet all the government’s obligations in early June and possibly as early as June 1,” she told the conference, sponsored by the Wall Street Journal. “We no longer see very much likelihood that our resources will enable us to get to the middle or end of June.”
Yellen said she planned to update Congress “shortly, and try to increase the level of precision,” though she emphasized there remained much uncertainty about day-to-day government payments and receipts.
“It’s hard to be precise about exactly which day we will run out of resources,” she said, referring to the so-called X-date.
JPMorgan Chase & Co. chief US economist Michael Feroli wrote to clients Wednesday advising that “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.”
Debt-limit negotiations are expected to resume at noon Wednesday after discussions Tuesday hit a fresh impasse, with the two sides said to be far apart on key issues. Republican lawmakers have refused to raise the cap on US borrowing unless President Joe Biden agrees to spending cuts.
Yellen said she viewed a deal in the coming days as possible. “They’re working toward an agreement that could command bipartisan support,” she said.
Yellen again avoided providing specifics about what the Treasury and the White House would do in the event of a default. Many observers and market participants assume the Treasury would prioritize payments of interest and principal on outstanding debt securities.
“Treasury and President Biden will face very tough choices if Congress doesn’t act,” she said.
(Updates with market data and additional Yellen comments from third paragraph.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.