Janet Yellen. Credit: Kent Nishimura/Bloomberg.
Last Friday, outgoing Treasury Secretary Janet Yellen said that her department would start taking special accounting maneuvers, as of today, to avoid breaching the U.S. debt limit—and she urged lawmakers again to take steps to increase or suspend the statutory ceiling. In a letter to bipartisan congressional leaders, Yellen advised them “of the extraordinary measures that Treasury will begin using on January 21,” adding, “I respectfully urge Congress to act promptly to protect the full faith and credit of the United States.”
The letter marks the second notification in the latest tussle over the debt limit, which kicked back in on January 2. Congress suspended the debt ceiling in 2023 after a close-fought battle by lawmakers to avert a default on federal obligations. The limit is currently set at about $36 trillion.
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Some debt-market strategists have anticipated an easier path to an agreement to suspend or lift the cap given Republicans’ unified control of Congress and the White House now that Donald Trump has taken office. Until that action is taken, however, the Treasury Department will need to deploy measures used repeatedly over the decades to avoid breaching the limit. Trump’s nominee to succeed Yellen as Treasury chief, Scott Bessent, vowed at his Senate confirmation hearing last Thursday that there would be no default on his watch.
In her letter, Yellen advised that the Treasury’s extraordinary measures would begin by redeeming a portion of, and suspending full investments in, the Civil Service Retirement and Disability Fund. Treasury will also suspend additional investments of amounts credited to the Postal Service Retiree Health Benefits Fund. She also said that those funds will be made whole after Congress acts on the debt ceiling. She gave no indication about how long the accounting measures and Treasury’s cash balance would last. “The period of time that extraordinary measures may last is subject to considerable uncertainty, including the challenges of forecasting the payments and receipts of the U.S. government months into the future,” she wrote.
Should the Treasury become unable to issue fresh debt and then run out of cash, the U.S. government would be in danger of defaulting on some financial obligations. Wall Street is already trying to handicap how long the U.S. government has before it’s unable to pay its bills because of the newly reimposed debt ceiling. That so-called “X-date” has been estimated by some strategists to be looming around July or August.
In the event of congressional standoffs, investors tend to dump the Treasury bills most vulnerable to a potential default in favor of securities maturing before or after the X-date, creating a kink in the curve. Right now, though, the bill market is showing no signs of angst, given the uncertainties about the outlook.
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