Pimco: The debt ceiling deal is like passing a kidney stone

Investors are worried about the debt ceiling debate in Washington. Stocks have wobbled all week, stalling their new AI-induced rally, and yields on one-month Treasury bills—which mature by the time the government repays its debt in June—topped 5.6% Wednesday, the highest level since before the Global Financial Crisis in 2007.

This is a sign that traders are avoiding government bonds because of serious concerns about a potential US debt default. Treasury Secretary Janet Yellen warned that on June 1, the so-called X datethe US government could run out of money and the economy”disasters” may follow. But Libby Cantrill, a managing director and head of public policy at Pimco, still believes lawmakers will strike a deal and avoid the worst-case scenario.

“It is our view – with a high degree of conviction – that the recent on-and-off and now on-again negotiations will result in a debt ceiling deal ahead of the US Treasury’s ‘X date’ of June 1,” he wrote on Tuesday articleTHE Financial Times first reported.

Cantrill argued that making concessions for a deal could be politically unpalatable for lawmakers, and could lead to a “last-minute deal,” but “neither party has any political incentive to default.” That means even if there is last-minute drama, ultimately a debt ceiling deal will go through.

“To use an apt, though graphic analogy: Passing the debt ceiling is like passing a kidney stone—we know it’s going to pass, it’s just a question of how painful it will be. We’ll declare that we’re in painful time now,” he wrote.

Cantrill’s view is a FREQUENTLY on Wall Street and among the highest in the world economists, despite recent signs of default fears among investors in the stock and bond markets. Jeremy Siegel, a professor at the Wharton School of the University of Pennsylvania, argues his WisdomTree Commentary this week that “there is no chance that the debt issue will not be resolved, although there will be posturing and debate until the last minute.”

However, legislators have prioritized many issues and not much progress has been made. Last Wednesday, House Speaker Kevin McCarthy said the reporters at a news conference that negotiations with the Biden administration have stalled over disagreements over proposed GOP spending cuts.

“I sent our negotiating team to the White House to try to conclude the negotiations,” he said. “The off ramp here is to solve the problem – spend less than we spent last year. That’s not difficult.”

Rep. Garret Graves, a Republican from Louisiana who is a negotiator of the talks, said the White House wants to maintain the current level of spending, but Republicans have “made it clear that that is a nonstarter.”

Democrats, who previously opposed Republicans’ push for work requirements for federal aid programs, backtracked after Wednesday’s press conference. House Minority Leader Hakeem Jeffries argued that the GOP’s spending cuts are “draconian,” the Wall Street Journal reported. And White House press secretary Karine Jean-Pierre added that there are many “great suggestions”—including many under-the-radar issues like energy permitting reform for traditional and clean energy and changes to how Medicare pays providers—that the administration feels will harm “every area in the country.”

Despite the conflict, McCarthy said he still hoped to make progress in negotiations this week, adding: “We will not default.”

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