Instead of Defaulting, the US Government Could Do This

Treasury Secretary Janet Yellen

Stocks rallied today as the market continued chopping sideways. The Dow, S&P, and Nasdaq Composite all gained, led higher by roaring bank shares. Optimism over a debt ceiling deal drove markets this morning after House Speaker Kevin McCarthy said it’s “possible to get a deal by the end of the week” due to a “better process” for further talks.

“Now we have a structure to find a way to come to a conclusion,” McCarthy explained.

“I think at the end of the day we do not have a debt default. I think we finally got the president to agree to negotiate.”

President Biden echoed McCarthy’s remarks, adding that today’s meeting was “productive” and he’s confident “that we’ll get the agreement on the budget, that America will not default.”

But even with talks apparently progressing well, not all analysts are sold on an imminent debt ceiling-fueled rally. Treasury yields are still rising despite recent developments while the S&P remains mostly rangebound.

“They’re not really giving any kind of a clue as to which way they’re likely to break, meaning favorably or negatively. We’re still in an up channel for the S&P 500. But I think we are in search of a catalyst to either break out or break down,” said CFRA Research’s Sam Stovall.

In addition, JPMorgan strategists told clients today that reaching an agreement may take longer than McCarthy and Biden are letting on.

“While [House Speaker Kevin] McCarthy said a deal is possible by end of this week, the timeline may be by the end of next week ahead of Memorial Day,” The bank’s US market intelligence team wrote in a note.

“With that in mind, equities may trade in a tight range until an outcome is observed with the biggest downside risk coming if we enter Memorial Day weekend without a solution, given the early June X-date.”

Treasury Secretary Janet Yellen identified June 1st as “D-Day” (Default Day) if Democrats and Republicans fail to strike a deal. And while it’s true that the US could default, Yellen left out the possibility of cutting into federal employee wages/social security payments instead.

If June 1st arrives without a debt ceiling agreement, the government could prevent the immediate damage of a default by witholding payments until a deal is reached. There would still be major market turmoil, of course, but it would at least buy both sides of the debt ceiling debate more time.

Will it come to that, though? Probably not. The government always lifts the debt ceiling. This time should be no different.

If both sides drag their feet, however, McCarthy and Biden know that June 1st isn’t necessarily the “true” default deadline, which increases the odds of them dragging talks into Memorial Day weekend and even past Yellen’s (supposed) point of no return, which would only cause more knee-jerk selling with each passing day.


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