On April 17, House Majority Leader Kevin McCarthy gave a speech about the national debt and the need to curb the country’s borrowing, but he did it at a weird place, the New York Stock Exchange, where lots of stocks and options and other financial instruments are traded — but not really government bonds, which Washington could in theory default on if the crisis isn’t resolved. He called the brinkmanship over the U.S.’s spending limits “an opportunity to examine our nation’s finances,” a message that would have more resonance for voters in, say, Georgia’s 14th District than it would with a group of downtown Manhattan brokers who pay fees to an industry group that’s called for the raising of the debt ceiling. And however warm a reception he may have gotten, the message from the bond markets — which, for the record, are usually traded over Bloomberg terminal screens — was clear: That day, there was a sell-off in the Treasury bills that mature around when the U.S. is expected to default, reaching their most recent low point. By the end of the day, the picture that the House of Representatives’ highest-ranking Republican had given to the financial professionals in New York was that it was as risky a time as ever for Congress to throw the U.S. economy into an unprecedented economic catastrophe.
Nobody really knows when the U.S. would be at risk of defaulting on its debt, but it could be soon — Janet Yellen warns it’ll be in June, while Goldman Sachs analysts think it’ll be around August. There is no doubt that the U.S. breaching its $31.4 trillion debt limit would be an economic disaster, wiping out the country’s economic goodwill around the globe, which would lead to a recession, permanently higher interest payments, more expensive mortgages and credit-card payments, and who knows what other kinds of financial repercussions.
But here’s the weird thing: Wall Street doesn’t really seem to care — at least, not yet. Talk to traders, bankers, brokers, consultants, strategists, or hedge funders, as I have in recent days, and you’ll hear variations on the same theme: It’s not really on anybody’s radar as a clear and persistent danger. “You may have found one topic I probably don’t have a particularly interesting opinion on! :),” texted one usually chatty CEO of a merchant bank, emoticon and all. “Not my area of expertise,” texted the CEO of a large investment bank — a company that thrives on borrowed money.
There’s a palpable fatigue among anyone in the financial class who’s watched a divided Washington go at it over the debt limit before. “I don’t feel the sense of urgency about it so much as a dread of the whole process,” Kathy Jones, chief fixed income strategist for Charles Schwab, told me. The debt limit, created by Congress in 1917, only became a weapon thanks to Newt Gingrich in 1995, and there have been about a dozen partisan battles over the country’s spending limit in the years since. The U.S. came closest to the brink in 2011, when the Obama White House and Speaker John Boehner got so close to defaulting that Standard & Poor’s downgraded the country’s debt. The vote was so grueling that, in a subsequent fight over spending limits in 2014, Boehner raised the ceiling with no strings attached. “One reason Wall Street feels a little bit more calm is that we did go down in 2011,” Jones said. “Or rather, we came back. We survived it. We finally got something done. Many of us are holding that up as a worst-case scenario.”
In this way, talking about an August default with traders during an unusually sunny April has the same kind of detached feeling as guessing where the stock market would be if a giant asteroid crashed into Manhattan — sure, it would be terrible, but what are the odds? A U.S. default has the potential to be “catastrophic,” Mark Zandi, chief economist at Moody’s Analytics. In the global markets, the federal government is nearly synonymous with financial credibility. Aside from a technical word-processing error in 1979, it’s never missed a debt payment. And then there’s its large population, a raft of extremely successful companies, and a firm tax base, which make its ability to pay back borrowers unquestioned. The benefits of that credibility is in both the affordability of, say, homeownership — few other countries have the backstops to allow homeowners 30 years to pay off a mortgage — and the generally higher standard of living, giving people the ability to own cars, homes, multiple Apple devices, and all that.
But if Congress all of a sudden became unwilling or unable to pay, that would be a different story. Remember, debt limits are arbitrary, a way for lawmakers to hold the economy hostage in order to score a victory. If McCarthy continues to hold out against passing an increase that Democrats could agree on, that will destroy the credibility that’s baked into the relatively low interest rate on today’s Treasury bonds. “If the scenario is a breach on purpose, and they can’t get it together for any length of time, that’s just that’s catastrophic on every level. The reserve-currency status of the dollar will be threatened; our geopolitical standing will be threatened. It will be a mess,” Zandi said.
There is reason to think that, after all the near misses in the past, this standoff has more potential for real-world crisis. McCarthy was able to win his leadership role in part by allowing any Republican member to call for no-confidence in him, effectively handing over his priorities to Lauren Boebert, Matt Gaetz, and anyone else who wants to rustle up a little chaos. “2011 was obviously a very vexed time, but much less so than today,” Zandi said. “The the political backdrop is just much more discordant today than it was a little over a decade ago.” For all the enmity that existed between Obama and Boehner at the time, at least they were negotiating. “We’re in a situation where the two sides are not talking,” Stephen Dover, chief market strategist at Franklin Templeton, said. “The more extreme conservatives under McCarthy, they have different incentives because they have completely secure seats. Their audience are voters who are fine with them voting against this.” So far, McCarthy’s first attempt to lift the debt ceiling by $1.5 trillion has fizzled, with both the White House and his own side hardly acknowledging that opening bid.
Still, financial analysts are analysts of risk, and there have been attempts on Wall Street to assign a probability to the worst case scenario. A JPMorgan survey showed that most respondents put the likelihood of the U.S. breaching the debt limit at around 10 to 15 percent, but a few outliers thought it as likely as one in three. Dover put the probability of a default at under 10 percent. What makes it harder to figure out is that no one really even knows when the U.S. would run out of cash. Zandi puts the deadline as August 18 but is still waiting for more data from the federal government about tax receipts to see how much cash it will have on hand. Goldman notes that tax payments are already lower this year than in 2022. And most of California, the nation’s most populous state, has until October to file their taxes this year because so much of the state was on fire — disaster-relief zones get an extension.
Still, there is evidence that Wall Street is beginning to feel the fear at the margins. One of the most direct measures of fear is a derivative contract called a credit-default swap — a complex-sounding instrument that works like an insurance policy. Traders buy them when they’re worried that a borrower will default on their obligations, and, according to The Wall Street Journal, it’s become much more expensive lately to hedge against the U.S. defaulting. But if you talk to enough traders, they’re just as likely to dismiss that as meaning anything; there are any number of technical or regulatory reasons for someone to buy a swap or to sell off a bond or a stock that could, hypothetically, get hosed in a default scenario.
What’s concerning, at least to a few, is the sense that, as remote as the risk of a default may be, there are fewer people who are willing to make a big gamble that it’s not going to happen. “Look, if you’re 100 percent confident that this is gonna get done, there’s an opportunity to buy the three-month bill, roll it over, and take advantage of that bump,” Jones said. “The fact that it’s not happening tells you I think that there is some reluctance to get involved.”