““This current stalemate runs the risk of undermining the foundation of the U.S. Treasury bond market:the full faith and credit of the U.S. government.””
The leaders of a group of Wall Street’s biggest banks, hedge funds and asset managers from the last 25 years has penned a letter to Treasury Secretary Janet Yellen, laying out the dangers of Congress not reaching a debt-ceiling agreement before the government runs out of cash.
“A protracted standoff over the debt limit will dramatically increase taxpayer costs and exacerbate market stress. Further, any delay in making an interest or principal payment by Treasury would be an event of seismic proportions, not only for
financial markets but also the real economy,” said the letter dated Tuesday and signed by Treasury Borrowing Advisory Committee Chairs and Vice Chairs, 1998 – present.
Read more: U.S. could run out of cash as soon as early June, Bipartisan Policy Center says
Yellen herself has recently warned that U.S. could default on its debt as soon as June 1 if Congress doesn’t increase the borrowing limit. The standoff threatens the government’s ability to borrow and meet its financial obligations in full to pay Social Security and Medicare, tax refunds, salaries of military and federal employees and pensions.
The Treasury advisory group’s warning coincided with a meeting between President Joe Biden and top lawmakers to discuss the debt-ceiling on Tuesday, with talks set to continue on Friday.
Thus far, anxiety around the standoff has focused mostly on the short-term Treasury bill market, but warnings about fallout to other markets have been increasing.
Stanley Druckenmiller, chairman and chief executive of Duquesne Family Office, said Tuesday that a “technical default” would cause a “market event,” in remarks at the 2023 Sohn Investment Conference. Some, such as former PIMCO co-founder Bill Gross have brushed aside concerns, saying a deal always gets done and investors shouldn’t worry.
Read: What happens to the dollar if U.S. debt ceiling isn’t raised?
But the advisory group said “the role of the Treasury market as backbone of the entire financial market cannot be overstated.” They noted how Treasury market dysfunction can rapidly spread to other markets, such as in March 2020, harming U.S. consumers, businesses and municipalities.
Tensions have already triggered weak auctions of U.S. Treasury bills and rating agencies cautioning over possible U.S. government downgrades and credit risks, the group said. And any issuer whose credit relies on U.S. government backing would be at risk, including government-sponsored enterprises such as Fannie Mae or Freddie Mac and vital infrastructure like Amtrak or TVA, they added.
“The validity of Treasuries as eligible collateral for margin would be called into question, with devastating consequences for interest rate derivative, commodity,
and mortgage markets,” said the former and current chairs, who include Beth Hammack, co head of the global financing group at Goldman Sachs, Thomas Maheras, managing partner at hedge fund Tegean Capital Management, and Curtis Arledge, vice chairman of BNY Mellon.
“The short-term impacts of a protracted negotiation are costly; the long-term implications of a default are unthinkable,” they said, urging the debt limit be increased “with all due haste” and a permanent fix found to avoid future wrangling.
