While officials from the Obama Administration raised their rhetoric over the weekend about the possibility of a debt default if the debt ceiling isn’t raised, they privately have been telling top executives at major U.S. banks that such an event won’t happen, FOX Business has learned.
In a series of phone calls, administration officials have told bankers that the administration will not allow a default to happen even if the debt cap isn’t raised by the August 2 date Treasury Secretary Tim Geithner says the government will run out of money to pay all its bills, including obligations to bond holders. Geithner made the rounds on the Sunday talk shows saying a default is imminent if the debt ceiling isn’t raised, and President Obama issued a similar warning during a Friday press conference after budget negotiations with House Republicans broke down.
– Primary Dealers Met With Treasury on Debt Ceiling, Auctions (Bloomberg, July 29, 2011):
The U.S. Treasury Department met with bond dealers in New York to discuss next month’s quarterly auctions of notes and bonds and the debt ceiling.
The Treasury canceled its regularly scheduled individual meetings with bond dealers in favor of the group meeting, the department said in a statement today. All 20 primary dealers were invited.
The government is inching closer to running out of cash before an Aug. 2 deadline to raise the $14.3 trillion debt ceiling. House Republican leaders scrapped a vote on the debt ceiling bill late yesterday, fueling concern a compromise by the two parties won’t be reached before the deadline and casting doubt on whether the Treasury can sell more debt.
Officials are “talking to the Street, making preparations just in case they have to reschedule their regular auctions,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “This is a positive sign.”
The meeting was at the Federal Reserve Bank of New York’s headquarters in downtown Manhattan.
“There was a general consensus among all participants that Congress should act as quickly as possible to raise the debt ceiling for as long a period as possible to lift the cloud of uncertainty from the economy,” Treasury said in the statement.
The Federal Reserve is also preparing guidance for banks in the event that the U.S. debt limit isn’t raised and the Treasury Department runs out of money to pay all of its bills, according to a government official who asked not to be identified because congressional negotiations are still under way.
Treasuries advanced as investors sought refuge. An administration official said yesterday the Treasury will give precedence to making interest payments on government debt.
Yields on 10-year notes tumbled 10 basis points, or 0.10 percentage point, to 2.85 percent, after reaching the lowest level since July 12, at 1:43 p.m. in New York, according to Bloomberg Bond Trader prices.
“This is uncharted territory for everybody involved,” Pollack said. “Whoever thought we would be at this brink of a default of the United States of America.”
At its previous refunding announcement on May 4, the Treasury announced plans to sell $72 billion in its quarterly sales of long-term debt and that it anticipated auction sizes would “remain steady” as Congress and the White House debate raising the debt limit. The Treasury’s next scheduled refunding announcement is for Aug. 3 at 9:00 a.m.
The government sold $32 billion of three-year notes in May, June and July, and $24 billion of 10-year notes and $16 billion of 30-year bonds in May. The 10-year and 30-year sales were lowered to $21 billion and $13 billion respectively in June and July.