The deadlock over the debt ceiling puts the spotlight on the US government's cash management problems.
The earliest date Treasury Secretary Janet Yellen tells the federal government is less than a month awayyou may not be able to pay all your billsand pay all your debt obligations. Others, including nonpartisanCongressional Budget Office,they estimate that the government may exhaust its ability to pay all bills by early June.
President Joe Biden and Speaker of the House Kevin McCarthywe meet on tuesdaynegotiate an agreement that increases the debt limit of 31.3 trillion dollars and preserves the full confidence and credit of the country. McCarthy later told reporters that "I haven't seen any new movement."Another meeting is scheduled for next week afterFriday's meeting has been postponed..
observersthey did not expect an agreementTuesday. But theywait for a dealto avoid non-compliance by the United States.
“Experts say that if the government exhausts its ability to pay all the bills, cash management problems could spread beyond the federal government and affect economies, investors and households.”
Even the remote possibility of default is worrisome. Experts say that after the "X date," when the government exhausts its ability to pay all bills, cash management problems could spread well beyond the federal government and affect economies, investors and households.
Bank deposits would still be covered up to $250,000 due to protection from the Federal Deposit Insurance Corporation. However, they point out that interest rates on loans may increase.
Even without the drama of the debt ceiling, interest rates are already rising andbanks are already tightening credit criteria.
Meanwhile, money market mutual funds with exposure to Treasury debt may have plenty of institutional and retail investors asking for their money back, experts say.
“Experts say that money market mutual funds with exposure to Treasury debt may cause many institutional and retail investors to file for their money back. Banks are already tightening the criteria for granting loans.”
Rising interest rates and volatility in the banking sector have drawn more money into highly liquid, conservative mutual funds, which now hold more than $5.7 trillion in cash.
"This is the worst dead end possible," said Urooj Khan, a professor at the University of Texas McCombs School of Business, where he studies financial crises.
Of course, there is never a good time to bankrupt the federal government. "There is widespread agreement that there will be financial and economic chaos," Treasury Secretary Janet Yellen said.Sunday ABC interview.The "X date" could come as soon as June 1, Yellen said.
Of course, cash is only one part of the wallet that allows you to accumulate and protect your wealth. At the Bipartisan Policy Center, the potential for a stock market sell-off that would gut retirement accounts worries some observers more than the implications of a potential cash investment default.
Prolonged insolvency would reduce 45% of the stock value,AccordingWhite House Council of Economic Advisers.
What would happen if that happened? "Your 401(K) is now a 201(K)," said Jason Fichtner, vice president and chief economist at the Bipartisan Policy Center, a Washington-based think tank that promotes bipartisanship.
At a time when people were more attentive to savings returns, Isecurity of your deposits— Here's a look at the default implications:
Any default still doesn't change the fact that the Federal Deposit Insurance Corporation provides deposits of up to $250,000 per depositor per account, Khan said.
In fact, an FDIC spokesperson said that "people's money in escrow accounts is still available on demand" and certificates of deposit "still accrue interest." Deposit insurance remains the same.”
When the Federal Reserve raised its benchmark interest rate to deal with inflation, bank account rates went up with them. Maybeeven be the peak momentto use proceeds from savings accounts and CDs, experts say.
However, immediately after a default, banks may find themselves under pressure and need deposits to maintain liquidity, Fichtner said.
“Consumer loans, such as mortgages and car loans, tend to follow Treasury yields. Price and yield move in opposite directions, and a debt default can cause interest rates to skyrocket.”
He said banks would have "every incentive" to maintain deposit accounts, so immediately afterward they would likely maintain competitive deposit rates. “We have never done this before. I hope we don't find out," Fichtner added.
However, if banks were under pressure to keep deposit rates competitive, Fichtner and Khan found that lending rates for all types of loans to households and businesses would skyrocket.
Consumer credit, p.mortgagesand auto loans, typically track the yield on Treasury debt. Price and profitability move in opposite directions. So if the market price of Treasury debt falls because it is no longer considered a safe haven for investors, this increase in yields would have dire consequences.
"Everything compares to them," Khan said of Treasury debt. So if government bond yields rise due to increased risk, credit in "all other assets will also reflect that risk."
The White House agrees.this last blog: “The ability of households and businesses, especially small businesses, to borrow from the private sector to offset this economic crisis would also be at risk. Default risks would cause interest rates to soar, including on financial instruments used by households and businesses: government bonds, mortgages, and credit card rates.
Mortgage rates, which currently exceed 6%, could rise to 8.4% in the event of insolvency,in line with Thursday's forecastZillowZ, -1,05%.Rising insolvency rates would make monthly mortgage payments 22% more expensive through September, the real estate firm said.
File: This is where investors can "hide" as the US debt ceiling approaches, based on 2011 market reaction.
Even bargaining can raise the stakes. Mortgage rates rose about 0.7 to 0.8 percentage points in two months during the 2011 debt ceiling negotiations.White House Council of Economic Advisers to the Biden Administration.
Now, short-term government bond yields are already showing jitters, as fearful investors eye the debt that would be generated around Date X.
The yield on a three-month Treasury billTMUBMUSD03M, 5,245%recently rose to levels not seen since January 2001. Monthly Treasury Bill YieldTMUBMUSD01 million, 5.401%oscillate at levels dating back to 2008.
Increased short-term performancecould be an opportunityat a time when Treasury bills were already a tempting place to look for cash, according to Bill Gross, former co-founder of Pimco, an investment management firm focused on actively managing fixed income.
money market funds
Money market mutual funds consist of assets such as high-quality, fast-maturity government bonds. Deposits in these funds are considered extremely low risk.not covered by the FDIC.
Ten Simple Interest Rate Hikes by the Federal Reserve Turned Money Market Funds into Mutual Fundsa most tempting spot for crops.Banking system concernspushed even more moneyto the funds from the deposits of the banking systems.
According to Peter Crane, president of Crane Data, which tracks the money market industry, money market funds held a record $5.73 trillion this week. He said the fund's shares have been setting and resetting size records for two months. Investors poured $300 billion into them in the three weeks leading up to March 29.
Of the $5.7 trillion, more than $3.75 trillion is money from institutional investors, and another $1.86 trillion comes from retail investors, according to Crane Data.
Crane and others explain that different types of money market funds have different degrees of exposure to a default crisis. There are government money market funds, some of which are government money market funds. "Mainstream" money market funds may invest in government debt and securities, but also in low-risk commercial ventures. Municipal money market funds (debt securities issued by state or local governments) are another option.
As interest rates continue to rise, Crane said the funds' main investment is in repurchase agreements. These deals, super-short-term loans backed by collateral like treasuries, represent more than $3 trillion, or more than 57% of the fund's holdings, according to Crane.
Treasury debt is a distant second, accounting for $1 trillion or 18% of funds, Crane said.
So what happens to money market fund shares in the event there is even a small chance of default?
One risk would be "breaking the price," said Khan of the University of Texas.
Money market funds aim to keep net asset value stable at $1 per share, with the breakout occurring when the stock falls below $1.
The consequence of breaking a dollar is that you invested $100 and now you're getting $98," Khan said. "Breaking a dollar basically means the investor doesn't get 100% return on investment at any given time."
“"Safety and liquidity have always been and will continue to be our primary goals in managing money market funds for our clients, regardless of market conditions."”
— Loyalty Spokesperson
took place onSeptember 16, 2008, one day after Lehman Brothers filed for bankruptcy as investorsrushed money market fundsto get your money back. The Federal Reserve and Treasury had to quickly support money market funds after Lehman's collapse.
What if investors were pulling out large amounts of money en masse? Crane said much of this is likely to exceed the FDIC's deposit guarantee. "There's nowhere to run," he said. “Everything is a lot of money. All of these are uninsured deposits.
Still, according to Crane, the prospect of making money on a large number of trade requests would be "very far-fetched." First, they werereforms related to the rules of such redemptionsHe noticed.
The funds may be shifting their Treasury holdings to minimize maturities around the X date, as Crane, Khan and others have noted.
Major money market fund managers like JPMorgan Chase & Co.JPMand Vanguard did not respond to a request for comment.
"Safety and liquidity have always been and will continue to be our top priorities in managing money market funds for our clients, regardless of market conditions," said a spokesperson for Fidelity, another major money market fund manager.
"Our money market funds are conservatively positioned in light of debt ceiling risks, and our funds invest in high-quality money market securities and maintain a high level of liquidity," a MarketWatch spokesperson said.
Think 6% mortgage rates are too high? This is how bad it can get if the US defaults on its debt.