The negotiations between House Speaker Kevin McCarthy and the White House have continued without reaching an agreement to raise the debt ceiling. Although McCarthy has spoken optimistically about their progress, the credit rating agency Fitch Ratings downgraded the AAA credit rating for US debt from stable to negative. This is due to political gridlock preventing a resolution before the approaching X-date, which is when the US Treasury runs out of money and capacity for extraordinary measures to avoid incurring new debt. This impasse may lead to missed payments on government obligations and signal downside risks to US creditworthiness.
The Treasury yields, a measure of debt-ceiling risk, continue to remain stable, although the rate is increasing. However, yields of Treasuries due to mature between June 1 and June 7 are at risk and have surged to above 7%, causing prices to tumble. Although the market’s implied takeaway is still that a deal to avert default is the baseline assumption, the situation remains precarious and is changing rapidly.
Gregory Daco, chief economist at accounting firm Ernst & Young, said,
“The underlying assumption is that they will manage to pass some last-minute agreement — pulling out of the same playbook as 2011.”
The Republican House Majority Leader Steve Scalise advised that the House will recess after Thursday’s voting. If an agreement is reached between McCarthy and President Biden, members will have 24 hours’ notice in case of the need to return to Washington for additional votes over the weekend or next week. Despite continued negotiations, the risk of default is looming, making an agreement all the more important.
