GOP Debt Ceiling Games: Investors Dump Treasuries, Fitch Issues Warning

While some Republicans have been recklessly denying the impacts of defaulting on our nation’s financial obligations and are refusing to ensure America pays its bills, financial leaders are already seeing the impact, as the Wall Street Journal reports:

While leaders in Washington have been chasing a deal to avert a U.S. default, investors and banks have dumped billions of dollars in government debt.

In the past two weeks, investors have sold mountains of short-term debt issued by the government. Banks have also reduced their holdings, trimming such debt by more than 50% over that period, according to data from the Federal Reserve Bank of New York. Amid anxiety about near-term finances, yields on U.S. debt that comes due in one month have risen to levels higher than for similar securities that don't mature for six months.”

“Some large institutions have taken steps to prevent clients from using short-term U.S. debt in certain transactions, to avoid being stuck with the debt in the event of a U.S. default. Citigroup Inc. has started telling some clients it would rather not take Treasurys maturing Oct. 24 or Oct. 31 as collateral, sounding out clients about whether they could instead use Treasurys that mature later, according to people familiar with the matter.”

Many market participants have also warned that tension about America's financial soundness could mean the U.S. ultimately pays more to borrow money, which could ripple through to borrowing costs for American companies, cities, states and other entities. And some foreign leaders have complained publicly about U.S. officials letting the nation approach default.”

“‘It is not about the inability of the U.S. to pay the bills,’ said Kenneth Silliman, New York-based head of short-term rates trading at TD Securities Inc. ‘It is the political dysfunction that is the problem.’

“A potential short-term deal also wouldn't eliminate the prospect of another cut to the U.S. credit rating, which raters have warned could be in order based on continued political instability and partisan wrangling.”

Fitch Ratings is now sounding the alarm. It said last week it may downgrade the U.S. if the government doesn't raise the federal debt ceiling in a ‘timely manner,’ and it warned that a prolonged government shutdown would ‘damage perceptions of U.S. sovereign creditworthiness’ and ‘signal that the U.S. government was in financial distress.’”

As the warnings continue to mount, Republicans should stop their default denial and instead act immediately to provide certainty to our economy and financial markets and ensure that America can pay its bills.