Wall Street banks along with several asset managers have been bracing for the consequences of a potential default as negotiations over raising the stunning $31.4 trillion debt cap for the United States government are nearing their conclusion.
A later preparation for a disaster of such a scale was conducted by the financial segment in the hectic time of September 2021.
However, this time, a senior industry insider claimed, the narrow window for finding a solution has bankers on the edge.
Janet Yellen, the United States Treasury Secretary, reiterated the ultimatum on Sunday. The Treasury Dept has further cautioned that the Fed may not be able to pay all of its bills by June 1, which is less than two weeks away.
Jane Fraser, CEO of Citigroup (C.N), stated that this debt ceiling battle is much more anxiety-causing than past ones.
Whilst Jamie Dimon, CEO of JPMorgan Chase & CO (JPM.N), stated that the bank is holding weekly meetings to discuss the consequences.
It is not easy to properly assess the damage that a default might cause because U.S. govt bonds backup the whole global-scale banking system, however, executives anticipate significant swings in the debt, equity, and many more markets.
It would be very difficult to buy and sell Treasury holdings on the secondary sector.
Wall Street executives who supervised the Treasury’s debt activities cautioned that the instability in the Treasury market would swiftly spread to the variant, mortgage, and commodity sectors because investors would doubt the legitimacy of the extensively used Treasuries as their collateral when needed for trades and loans.
Experts said that financial institutions should ask counterparties to substitute the bonds impacted by late payments.
Even a brief overdraft could trigger an increase in rates of interest, a drop in stock prices, and contractual violations in loan agreements and leverage contracts.
According to Moody’s Analytics, short-time funding channels would likely also become frozen.
The Treasury market turmoil as well as general volatility are being prepared for by banks, trading platforms and brokers.
This often entails scenario planning for how transactions on Treasury securities might be handled, the reaction of crucial funding markets, the availability of adequate technology, human resources, and cash to manage high volumes of trading, as well as assessing any potential effects on client contracts.
To avoid being forced to sell at the weakest possible time and to be able to sustain potentially dramatic asset price movements, large bond investors have emphasised that keeping high levels of liquidity is crucial.
Tradeweb, a system for trading bonds, reported that it was in talks regarding backup plans with customers, business associations, and other market players.
Many market participants would converse in advance of and during the times of possible missed Treasury payments, according to a playbook developed by the Securities Industry & Financial Markets Association (SIFMA), a top player industry association.
SIFMA has thought about various possibilities. The more likely scenario would be for the Treasury to announce ahead of a transaction that it might be rolling all those maturing notes over, prolonging them one day at a stretch, in order to make time to properly repay bondholders.
That would enable the market to maintain its operating, but interest for the postponed payment would probably not accumulate.
The Treasury wouldn’t shell out the principal or the coupon, and likely does not postpone maturities in the absolute worst-case scenario.
The Fedwire Securities Service, something that is used to retain, transfer, and settle Treasury securities, would cease to allow the trading and transfer of the overdue bonds.
Each scenario would probably cause serious operational issues and call for daily human changes to the trading and settlement procedures.
