Editor's note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day's biggest stories. Act on the news with POLITICO Pro. There's never a good time for the U.S. government to be unable to pay all of its obligations, but this would be an especially bad year for that. For one, the place where that debt is traded, the Treasury market, has already been under strain because of the Federal Reserve's relentless interest-rate-hiking campaign. Rising rates make even recent lower-rated debt less valuable, so there are fewer buyers right now. Also, the market relies on a small number of large dealers to intermediate trading for a huge volume of debt, and they can only hold a finite amount of assets on their books at any one time. These and other factors mean trading and pricing aren't as smooth as they would ideally be, so U.S. officials are trying to reform how the market is structured to make it work better. Since the Fed is still engaged in its battle against high inflation, it might be more hesitant to intervene and buy Treasury bonds to prop up the market, at least as dramatically as it otherwise would. That's because buying bonds would run at cross-purposes with its efforts to slow down the economy. So while markets have been through these showdowns before, notably in 2011, this time could prove more dangerous. Markets Policy Partners co-founder John Fagan, who led the Treasury Department's markets room from 2014 to 2018, said the Fed is battle-tested. But "that's the only factor I can think of that would be more favorable than last time around," he said. "Everything else looks worse." The U.S. already reached its $31.4 trillion borrowing limit on Thursday, and the Treasury Department has begun using "extraordinary measures" to pay its bills.Liquidity problems probably wouldn't get seriously worseunless the U.S. does actually go past the X date, when it is unable to meet all its obligations, according to people MM spoke with. Fagan said this is historically a political dilemma for Treasury, including while he was there: "It wasn't doing the Democrats a lot of favors for markets to be laughing this off … when, in reality, it's just the markets assuming it's not going to be a problem." "Almost by definition it's really hard to sit in an investment meeting and say, 'We've got to bring down risk and really change our portfolio strategy and do countermeasures and change the way we're investing based on this low-probability, high-impact risk.'" But if Congress doesn't raise the debt limit in time, the Treasury market could start looking more like it did in spring 2020, said Stanford University Professor Darrell Duffie, who has done extensive work on government debt markets. (Your MM host tried to explain what happened to Treasuries at the onset of the pandemic in plain English here, but suffice it to say, we nearly had a financial crisis). "Some investors in Treasuries bought them because they're supposed to be perfectly safe and some of those people will try to sell them," he said. "At some point, [dealers] may not be able to handle all of those demands." In the meantime, regular companies that invest in Treasuries mostly expect this to be resolved in time but for there to be choppiness in the meantime, said Michael Dombrowski, corporate treasury adviser at finance automation platform Rho. They might even be looking to capitalize on any mispriced Treasuries. But his clients would rather see the situation resolved. "It's causing them undue stress, and they should be keeping their eyes on the ball on other parts of their business," he said. Have a great weekend — Please keep sending tips to zwarmbrodt@politico.com.
| 
Comments
Post a Comment