New York Fed's Williams cautions of debt-ceiling risk to markets

BY Reuters | ECONOMIC | 09/27/21 06:49 PM EDT

By Jonnelle Marte

NEW YORK, Sept 27 (Reuters) - New York Federal Reserve Bank President John Williams on Monday warned of the potential negative market reaction if the United States failed to solve its debt-ceiling issue https://www.reuters.com/world/us/what-are-congress-options-funding-govt-raising-debt-limit-2021-09-26, but said market participants right now seemed to think the problem would be resolved.

The U.S. Congress faces a pair of approaching deadlines to fund the government and address the nation's $28.4 trillion debt ceiling. It has a Sept. 30 deadline to avert the start of a shutdown of government services.

Meanwhile, independent analysts warn that the U.S. Treasury Department is likely to exhaust its borrowing authority between Oct. 15 and Nov. 4, meaning the government faces the risk of a default if Congress does not act.

Asked about the scale of possible market disruption in a scenario where the debt ceiling goes unresolved and there is a default, Williams said that situation could cause investors to "get out of things and that's when you see that kind of extreme kind of reactions in markets."

"We're not seeing that, I'm not predicting that," Williams said during a video call with reporters on Monday afternoon. "I'm just saying that, you know, if you actually crossed that line and got into a place where the government wasn't paying off its obligations, I think it would create a very negative dynamic not only in the U.S. but around the world."

Williams said there was some "market pricing" around U.S. Treasury bills that mature, "around the time that people expect" the true debt limit is hit.

Still, he said that from everything he has heard, market participants expect "that this will be resolved." He added, however, that he does not think "you can look at market pricing really as an indicator of how big the risks are."

In a research note published on Monday, Michael Purves, CEO at Tallbacken Capital Advisors in New York, wrote that there was some debt ceiling-related tension reflected in the Treasury bills market, shown in pricing of three-month bills which "presumably won't be burdened by default risk" compared with one-month bills, but that it has yet to reflect the more dramatic spikes in 2011, 2013 and 2015.

(Reporting by Jonnelle Marte in New York Writing by Megan Davies Editing by Matthew Lewis)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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