A Shaky U.S. Bond Market Raises The Risks For Another Debt Limit Showdown

by | Nov 16, 2022 | Politics

Lawmakers in Washington were set Wednesday to create a clash in 2023 over the government’s ability to borrow money, even as a top Treasury official warned that the market for that debt, which is crucial to the global economy’s functioning, has already shown signs of weakness. The last big showdown over the debt limit happened in 2011, as a Republican House used it to extract concessions from then-President Barack Obama and a Democratic Senate.AdvertisementWhile that standoff led to the first-ever credit rating downgrade of U.S. debt, a repeat could lead to something worse, including a default that would result in Treasury securities no longer being the benchmark by which all other debt is priced, which would spike interest rates.And, unlike in 2011, the market for government debt is already showing cracks, in part from structural issues but also because of the flood of pandemic-related debt and the Federal Reserve’s relentless march to raise interest rates.“Over the past year or so, liquidity conditions in the Treasury market have shown some deterioration, but I believe these conditions largely reflect the heightened uncertainty about economic and geopolitical conditions,” Nellie Liang, the Treasury’s under secretary for domestic finance, told a Treasury market conference in New York City.“Still, there is a risk that more negative shocks could lead to disruptions in market functioning, particularly if the shocks were amplified by leverage, funding mismatches, or other constraints at Treasury market participants. It is therefore important we continue to closely monitor this critical market for signs of rising vulnerabilities.”AdvertisementU.S. Treasury Under Secretary For Domestic Finance Nellie Liang, pictured here at a Senate Banking Committee hearing in February, said Wednesday that the ability to easily trade U.S. Treasury debt has deteriorated somewhat in the past year or so.WIN MCNAMEE via Getty ImagesLou Crandall, chief economist with Wrightson ICAP, said the meltdown in demand for British debt after former Prime Minister Liz Truss’ ill-fated announcement of big tax cuts, showed how bad things can get.“That’s currently the nightmare scenario for every debt manager around the world. A replay of the 2011 debt ceiling showdown here would play out in a difficult market env …

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