![]() What Koltun calls a “game of chicken” also may already be denting the economy. Many analysts, including Moody’s Analytics Chief Economist Mark Zandi, think it’s highly likely that a financial market freak-out - think of the day in 2008 when Congress initially failed to pass the Troubled Asset Relief Program legislation meant to address the financial crisis - would stop any of the scenarios SIFMA envisions before they happen, or a few minutes after midnight on the day they will. However, it’s also likely that Treasury might pay some additional interest to make the bondholder whole. If that happens, there would be a holder of record for the debt on the day before the maturity was scheduled, who would be entitled to get paid. “It just illustrates the fact that the system wasn’t designed for this,” SIFMA notes. That’s because if a bond is supposed to mature - and be paid - on a particular day, the system assumes it has been. Strangely, the securities in question would probably simply disappear from the system. ![]() That would be far more chaotic, “a real problem scenario,” as SIFMA says. In a second scenario, which SIFMA said would be very remote, Treasury cannot, or does not, give any advance warning of a failure to make a payment, and it just happens. That means a great deal of uncertainty around pricing and what it means for all the downstream securities pegged to Treasury rates. For one thing, it could bifurcate the market for Treasury bonds and bills into those that are clearing normally and those whose maturity dates are being massaged, SIFMA told MarketWatch. While that sounds relatively orderly, it still leaves many unknowns. ![]() That would allow the maturity dates of the bonds in question to be changed: a Monday maturity date would be changed to Tuesday, a Tuesday maturity would be changed to Wednesday, and so on. If the Treasury Department knows that it will miss a payment, it would ideally announce that at least a day in advance. For now, there are two possible scenarios: The group has worked with financial infrastructure providers including Fedwire and FICC to try to devise some sort of playbook. SIFMA, the Securities Industry and Financial Markets Association, is the industry association that deals with the mechanics of how securities like sovereign bonds trade and settle. “But it would be a real problem scenario for the system generally and operations and settlement specifically.” Plumbing problems “We do not believe and the market does not believe it’s a likely scenario,” said Rob Toomey, SIFMA managing director, capital markets and associate general counsel. It’s a bit like Y2K - no one knows how the computers will respond. The current showdown in Washington also has raised big questions about the financial-systems infrastructure. default remains so incongruous that the reaction in financial markets isn’t the only unknown. “At that point, we expect Treasury would be left with very limited resources that would be depleted quickly,” she wrote in an update.īeacon’s Koltun, among others, thinks markets will start to get antsy even earlier than that. While most analysts expected a mid-October “X date,” when Treasury will run out of money to pay bills, Yellen on Tuesday told Congressional leaders that it would be Oct. What’s more, changes brought by the pandemic have made it far more difficult to assess the state of the Treasury Department’s expected payouts and inflows. ![]() 22, Barclays analyst Joseph Abate noted there’s additional uncertainty over the debt ceiling now because it coincides with a funding package Congress needs to pass. The stalemate on Capitol Hill right now is over a $3.5 trillion spending package. “If it does happen, it turns a manufactured political crisis into an economic crisis. “I see it as an exceedingly slim chance, although with all the theatrics, the possibility has been ramped up,” said Ben Koltun, director of research for D.C.-based Beacon Policy Advisors. Still, after a couple of topsy-turvy years in which the previously unthinkable became real, some Washington and Wall Street professionals have been girding for a worst-case scenario. sovereign debt generally has been considered the safest and most liquid to own in the world, and all kinds of financial market products and processes have been pegged to the orderly functioning of the nearly $21 trillion Treasury market. Treasury will run out of money to pay its bills, including bondholders, let alone what would happen next. It’s important to note that no one knows precisely when the U.S. 18, according to Treasury Secretary Janet Yellen, or the U.S. The debt ceiling, which is the amount of money lawmakers authorize the Treasury Department to borrow to pay for spending already authorized, must be suspended or raised by Oct.
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