Potential Silver Lining from Debt Debacle

LPL Financial’s Chief Economist, Dr. Jeffrey Roach, explains why the temporary suspension of debt issuance could ease pressure on Treasury yields.

Last Edited by: LPL Research

Last Updated: January 22, 2025

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Jeffrey Roach (00:00):

Hi, I am Jeffrey Roach, Chief Economist for LPL Financial, and this latest edition of the Street View podcast is titled "The Debt Ceiling is Hit...Again."

Jeffrey Roach (00:11):

As Janet Yellen, the Treasury Secretary during the Biden administration winds down her tenure, one of the last actions for her was a temporary suspension in debt issuance from January 21 through March 14. You can read the letter she wrote to congressional leaders just a few days ago on the Treasury press release website. So here are some key takeaways from these extraordinary measures. First, the length of these measures is uncertain. It depends in part on the amount of tax receipts the government will receive in the coming months. And further, it depends on political negotiations and decisions regarding the debt ceiling. The suspension period is a measure used by the Treasury to avoid breaching the debt ceiling and ultimately how long this period lasts hinges on when Congress agrees on a plan to either raise, suspend, or eliminate the debt ceiling. Second Treasury has cash to use in case of emergency, as our chief fixed income strategist Lawrence Gillum wrote

Jeffrey Roach (01:11):

in our research blog on lpl.com. Treasury is allowed to maintain this standard one week cash balance. So if the additional borrowing capacity erodes too quickly, or if tax receipts are less than expected, the Treasury can draw down its general account cash balance to ensure that it doesn't miss an interest or principle payment. This gives Congress and the new president time to once again get out of this self-inflicted kerfuffle, as Lawrence says. But once those measures do run out, the government risks defaulting unless lawmakers and the president agree to lift the limit on the U.S. government's ability to borrow. Third, the debt issuance suspension period could actually ease pressure on yields. U.S. bond market. Investors have faced significant challenges recently. The last thing they need is for the government to jeopardize the full faith and credit of its ability and willingness to meet its debt obligations. While the government's capacity to repay its debt is not in question, the ongoing debt ceiling debate introduces uncertainty regarding its willingness to do so. Although we anticipate that Congress will act in time to either raise, suspend, or eliminate the debt ceiling, these political maneuvers can create market volatility in the interim. Is there a potential silver lining for fixed income investors? This suspension period could offer temporary relief from supply and demand pressures that have recently driven Treasury yields higher. Well, that's all for now, but please follow us on social media and take care.

LPL Financial’s Chief Economist, Dr. Jeffrey Roach, explains why the temporary suspension of debt issuance could ease pressure on Treasury yields.

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