The intersection of politics and fiscal policy decisions aimed at taming the federal budget deficit is raising concerns about an impending March 14 deadline to raise the debt ceiling and avoid the first ever budget default by the United States.
"If there were an actual default, even a one-day delay in paying interest it would be catastrophic," said Pat Luby, senior municipal bonds strategist at CreditSights.
"Credit ratings would be in play with some of the rating agencies. It would affect the currency markets, but some munis may be perceived as a safe haven for individual investors."
The corrosive effect of rising debt levels, the cost of servicing it, and the outcomes of a default are worrying investors and are highlighted by a
"We think Treasury would likely want to continue to fully pay interest and principal on the debt, not want to default at all." said Louise Sheiner, a co-author of the paper and a Robert S. Kerr senior fellow of Economic Studies and policy director of the Hutchins Center on Fiscal and Monetary Policy.
"There's a lot of uncertainty about the legal authority to prioritize bondholders over other recipients of government payments."
Although Treasury securities and municipal bonds are linked by rate changes, the relationship between the two sometimes move in opposition.
"In some ways, munis are insulated from Treasuries," said Luby. "The market takes cues from the rates market and it's difficult, but not impossible, for munis to move in opposition to treasuries, but that tends not to go on for very long."
The fiscal policy stakes were raised on Jan. 21, as the country hit its borrowing limit and the Treasury activated its agenda of "
The measures include suspending investments into two government employee benefit funds, the Postal Service Retiree Health Benefits Fund and the Civil Service Retirement and Disability Fund. Once the ceiling is raised the Treasury is require to make the funds whole again.
If the debt ceiling isn't raised, the country begins a march to the "X date," that signals insolvency. The latest X date is estimated to be sometime this summer and is dependent on tax collections.
To get the budget ball rolling, the House Budget Committee is currently trying to hammer out a budget resolution markup while blaming the former administration for current conditions.
"In the final four months of the Biden-Harris administration, the federal budget deficit totaled $838 billion," said House Budget Committee Chairman Jodey Arrington, R-Texas via a statement.
"That's $306 billion more than the deficit recorded during the same period last fiscal year. Out-of-control deficit spending and unsustainable debt is the greatest long-term threat to our country and our children's future."
Ben Harris, vice president and director of Economic Studies at Brookings notes that the Committee's current effort "would pave the way for Congress and President Trump to add roughly $3 trillion in additional debt through a reconciliation package, including 4.5 trillion in new tax cuts."
The search to cut spending has led Congress to a
The Brookings paper postulates that even though the continued borrowing is politically unsettling there's still time to solve the problem.
"We are a really rich country, and we could clearly tax our way out of this and still be a rich country," said Wendy Edelberg the director of The Hamilton Project and senior fellow of Economic Studies at Brookings.
