Many investors are concerned that with the far right of the Republican Party taking control of the House of Representatives, a about to default.
If the views of Ralph Axel, rate strategist at Bank of America, are correct, they have good reason to be concerned.
“We think it is likely that by late summer or early fall the federal government will be temporarily forced to fulfill part of its daily obligations for a period of days to weeks.” he wrote in a commentary. .
“If that is the case, it would be the first time in U.S. history that it failed to meet any of its obligations due to debt ceiling laws. We think such an event would include a drop in stock and bond prices, potentially testing Treasury market performance and Liquidity.”
That might be an understatement. It wouldn’t be surprising if investors went into complete panic, selling off assets in buckets.
“The ability to test the activity and liquidity of the Treasury bond market” sounds technical and anodyne. But it is possible that the Treasury market will temporarily crash.
Axel foresees a plan to prioritize treasury payments
However, “we expect the Treasury to announce a payment priority plan quickly to protect debt from any default and calm the market,” Axel said. That certainly sounds reasonable. Investors have to hope he’s right.
“We think any fall in asset prices upon default will be a buying opportunity, as the debt ceiling will eventually be raised,” he said.
“And the economic damage from running the government in default would be minimal on an aggregate basis if it were relatively short-lived.”
Again, that sounds reasonable, and thankfully, Axel was right. But there is no guarantee that political extremists are going crazy.
In theory, it shouldn’t be difficult to assemble a coalition of nearly all Democrats along with a few Republicans to raise the debt ceiling.
GOP collaborators may face resistance
But any Republican joining that effort could face a major challenge from someone on the far right. And it could be worse: Those Republicans could become targets of physical violence.
Ax said that “marketable Treasury debt is unlikely to experience any defaults and this will be key to an orderly recovery of the market after the initial shock passes, ” he said.
“The total cost of market debt is not just small compared to other government obligations. But it will likely take precedence over all other payments in the Treasury payments system.”
Furthermore, “we expect the Treasury Department to announce a priority plan before entering the default zone,” Axel said.
Yellen: Debt will reach its current limit on January 19
Treasury Secretary Janet Yellen wrote a letter to Congress on January 13, announcing that beginning January 19, “the outstanding debt of the United States is expected to reach its statutory limit.” .”
Furthermore, “once the limit is reached, the Treasury Department will need to begin taking certain special measures to prevent the United States from meeting its obligations,” she said.
“The length of time that special measures may last may be significantly uncertain,” Yellen said.
“It is unlikely that the cash and special measures will run out before the beginning of June…. I respectfully urge Congress to act promptly to protect the full confidence and reputation of the United States.”
