The U.S. Treasury Department began taking \u201cextraordinary measures\u201d on Thursday to keep the federal government current on its bills, while giving Congress more time to come up with a debt ceiling deal.<\/p>\n
Those special measures allow the Treasury to keep paying its bills, including paying holders of government debt what they are due, while also, for now, continuing the issuance of bills and notes as scheduled in the near $24 trillion Treasury market<\/a>, the world\u2019s biggest debt market, to replace maturing debt.<\/p>\n \u201cThere\u2019s constant maturities and constant new issuance,\u201d said Jim Vogel, an interest-rate strategist at FHN Financial, in an interview Thursday. \u201cUntil the Treasury calls a halt to auctions they go on as normal<\/a>.\u201d<\/p>\n In part, new note auctions on deck will replace maturing bonds issued years ago, which should help give confidence to investors that the U.S. government intends to fully repay principal and interest, as promised. It also helps bide time for Congress to strike a deal to increase or suspend the existing debt limit.<\/p>\n \u201cYour early warning system is when 6-month bills get cheaper,\u201d Vogel said, adding that a wobble in that part of the Treasury market could signal worries by investors that top lawmakers could fail to reach a debt ceiling deal by this summer, which could then raise the threat level of a U.S. government default.<\/p>\n The U.S. debt limit was first set in 1917, and already has been increased or suspended 102 times since World War II, according to David Kelly, chief global strategist at JP Morgan Funds, in a recent client note.<\/p>\n The government had been approaching its current debt limit of $31.385 trillion, prompting Treasury Secretary Janet Yellen on Thursday to deploy special measures<\/a> to keep the government current on its bills, including making payments to bondholders, in moves she outlined a week ago<\/a>.<\/p>\n Kelly said the Treasury has leeway to make adjustments to postpone \u201cour real rendezvous with disaster\u201d potentially until June, but that from an economic and financial perspective a U.S. default would be \u201can unmitigated disaster.\u201d <\/p>\n Tax payments due to the U.S. government from corporations and households this spring also factor into the bigger debt-limit picture, while also influencing the final deadline for Congress to avoid an default on America\u2019s debt.<\/p>\n \u201cWe are coming up to the March corporate tax day,\u201d said Steven Ricchiuto, U.S. chief economist at Mizuho Securities, by phone Thursday. \u201cThat could boost the Treasury\u2019s balances,\u201d he said, while also noting the influx from taxes last was higher than anticipated.<\/p>\n With the ultimate showdown likely months away there are no discernible ripples in financial markets right now, but investors and analysts do seem to be paying much closer attention to the threat at a much earlier date than in past episodes, market watchers said.<\/p>\n Blame the intraparty battle between House Republicans that saw Kevin McCarthy elected speaker on Jan. 7 after a historic 15 ballots<\/a> \u2013 and only after agreeing to a series of concessions to a small group of far-right conservatives.<\/p>\n Investors are \u201ctalking about it early because it came on the heels of a very difficult election of the speaker of the House and the sense that there\u2019s now much more leverage that a few members of Congress may have to force this crisis that\u2019s more likely to hit later in the summer,\u201d said Christopher Smart, chief global strategist at Barings and head of the Barings Investment Institute, in a phone interview.<\/p>\n Some recent history underscores the concern. It took all of then-Speaker John Boehner\u2019s political capital \u2013 \u201cand then some\u201d \u2013 to finally secure a vote among the Republican caucus on raising the debt limit during a similar showdown in 2011<\/a>, Smart noted, observing that Boehner had \u201cmuch more leeway\u201d than McCarthy.<\/p>\n \u201cSo if there are five or more members who won\u2019t vote\u201d on raising the limit \u201cwithout certain conditions being met,\u201d it\u2019s easy to imagine potentially ugly scenarios that could rattle markets, he said.<\/p>\n Former Federal Reserve Bank of New York President Bill Dudley said Thursday in an interview with Bloomberg that a U.S. default would be a \u201chuge blow\u201d to markets, but also that a contingency plan exits if it happens. <\/p>\n \u201cThe way it works is if you actually run out of money, the Treasury will decide what payments to present to the Fed,\u201d Dudley said. \u201cPresumably, the Treasury will decide to prioritize debt repayment and interest payments, so there isn\u2019t a technical default. The Fed will basically honor the payments the Treasury present.\u201d <\/p>\n The Fed also could step in to shore up market functioning in the Treasury market, if needed.<\/p>\n \u201cWhat we saw in 2011 is that the Treasury market got stronger until we got close to the deadline,\u201d Dudley said. \u201cPeople don\u2019t want to buy Treasury bills that are maturing right around the time the debt limit could be binding.\u201d<\/p>\n As a result of a 2011 debt-ceiling standoff, credit rating firm Standard & Poor\u2019s downgraded the U.S. credit ratings to AA from AAA. <\/p>\n U.S. stocks declined for a third straight day on Thursday, with the Dow Jones Industrial AverageWhat\u2019s next in the U.S. debt limit standoff <\/h6>\n
Why investors are focusing on the debt ceiling now <\/h6>\n
What\u2019s at stake<\/h6>\n
\n DJIA,
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\n losing 252.40 points, or 0.8%, while the S&P 500
\n SPX,
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\n shed 0.8% and the Nasdaq Composite Index
\n COMP,
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\n dropped 1%.<\/p>\n