Financial markets brace for default as Biden, Republicans dig in on debt limit

Published

2 years ago

May 9, 2023

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The partisan standoff over the debt limit, which hardened over the weekend when 43 Senate Republicans said they would not support a clean debt-limit increase, sets the stage for severe turbulence in the financial markets, experts warn.

The yield on Treasury bonds maturing next month spiked last week, signaling that investors are already preparing for the possibility that President Biden and Republican leaders in Congress won’t reach a deal before the Treasury Department runs out of money next month.

Biden will meet with the top four congressional leaders at the White House Tuesday to discuss how to avoid a default, but lawmakers expect little progress from the meeting. It’s the first face-to-face meeting between Biden and Speaker Kevin McCarthy since Feb. 1.

There’s growing pessimism in Washington and the financial markets that political leaders will negotiate a long-term deal by early June, the deadline set by Treasury Secretary Janet Yellen.

If an agreement doesn’t come together in the next month, congressional leaders will have to agree to a short-term extension of the debt limit to give themselves more time to negotiate. More debt ceiling coverage from The Hill: Pressure grows on Biden to bend in debt ceiling talks Debt limit battle: How we got here

Without a short-term agreement, the US would go past the so-called “X-date” and face major turmoil in the markets.

“I genuinely believe there’s a better-than-50-percent chance that there will be default, it will occur over a weekend and when the chaos it creates becomes obvious to all the players, they’ll have to reach some sort of accommodation,” said former Sen. Judd Gregg (R-N.H.), who previously served as Senate Budget Committee chairman and an advisor to Senate Republican Leader Mitch McConnell’s (Ky.) leadership team.

“The potential is pretty dire,” he warned. “Right now, you don’t have the leadership to solve the problem, that’s the bottom line.”

Gregg said McCarthy faces a challenge to his speakership if he brings a debt-limit bill to the House floor without major fiscal reforms, but the cuts that he’s proposing don’t have a chance of passing the Senate.

McConnell’s support for a letter signed by 43 Senate Republicans declaring they will not support “any bill that raises the debt ceiling without substantive spending and budget reforms” has failed to move Democrats away from insisting on a clean debt-ceiling increase.

“I don’t know what Democrats have to negotiate,” said a senior Senate Democratic aide, who pointed out that Republicans agreed to raise the debt limit three times under former President Trump without drama. “We’re not the ones being inconsistent.”

“At the end of the day, a lot of their behavior is playacting,” the aide said, predicting a spike in stock and bond market volatility will pressure Republicans into backing off their demands. “They have investments, too.”

The aide, pointing to the downgrade of the nation’s credit rating in the 2011 debt-limit standoff, said that this year’s battle in Washington over the debt ceiling would also shake the financial markets.

“We have in the past. I don’t know why this would be different,” the aide said.

Financial markets are already starting to show signs of stress related to the impasse over the debt ceiling.

One-month Treasury bills maturing around a projected date in early June, when the government could run out of money, saw their yields spike to 5.76 percent last week.

Yields have climbed far above recent averages closer to 4.5 percent and significantly higher than the recent low of 3.3 percent in April.

“The Treasury bills curve appears to imply risk of disruption in June, July, and October,” Goldman Sachs chief economist Jan Hatzius wrote in a note last week to investors.

Treasury bills maturing in early June were trading at more than a 50-basis point discount compared to May and July at the end of last week.

“Investors are paying a healthy premium to own bills that mature in May while demanding hefty compensation to hold T-bills that are maturing in the first half of June,” analysts for Wells Fargo wrote in a note to investors last week.

Wall Street insurance policies, which are known as credit default swaps, against one-year Treasuries hit a record-high spread of 1.77 percent late last week in a spike that was notable both for its timing and its size.

“There is likely genuine fear that a divided government and increased political polarization could make finding a solution less likely. Meanwhile, the dual threats of rising deficits (with larger federal payments, some indexed to inflation) and higher Treasury debt service costs also increase the chance of an accident, contributing to the higher perceived riskiness of owning US debt,” Deutsche Bank analyst Steven Zeng wrote in a May 5 note.

Uncertainty in the Treasury market, which is already dealing with one of the fastest quantitative tightening cycles in decades, could spell more trouble for the U.S. banking sector.

Sen. John Cornyn (Texas), an advisor to the Senate Republican leadership team, said local and regional banks in his state worried about losing deposits.
“This is a very dangerous situation. There’s been a big shift in deposits to places people perceive as safer,” he said. “All of them are nervous, our community bankers, our regional bankers. We need to try to calm this down.”

Cornyn said the possibility of a national default isn’t helping to calm the jittery banking sector.

“I think it’s creating unnecessary anxiety,” he said.

One senior Senate Republican aide warned that a drop in demand for Treasury securities could trigger a broader market selloff.

Treasury security auctions will likely become increasingly sensitive to the Treasury Department’s looming X-date, analysts say.

“Yields are elevated beginning with the June 6 maturity, which the Treasury in January suggested was the soonest the Treasury could exhaust resources under the debt limit. The yield is highest around mid- to-late-July maturities, when we think the Treasury will have exhausted resources under the debt limit if it has not in June,” analysts for Goldman Sachs wrote.

Auctions scheduled for this Thursday for four-week and eight-week bills due to mature within this time frame could see some additional stress, as could auctions on May 25, June 8 and June 15.

The Bipartisan Policy Center argued in an analysis published Tuesday that “managing Treasury security auctions and meeting all obligations will become increasingly challenging as reserves dwindle.”

“Concerns are also mounting that the country could find itself in a similar position to 2011, when Standard & Poor’s downgraded the U.S. from its AAA rating,” the think tank said.

Yellen warned in an interview with ABC’s “This Week” that “it’s widely agreed that financial and economic chaos will ensue” if Congress fails to act by the deadline. Debt limit battle: How we got here US could default on national debt as soon as early June: analysis

A report published by the Penn Wharton Budget Model Monday said the deadline to raise the nation’s debt ceiling will hit sooner than previously thought because tax receipts in April fell below projections.

Alexander Arnon, the director of business tax and economic analysis for the Penn Wharton Budget Model, said “we found, as noted by the Treasury secretary and by the Congressional Budget Office, that tax receipts in April came in quite a bit lower.”

“There was a drop off [in tax receipts] relative to what was expected and we are much closer [to default] than people had hoped earlier this year,” he said.

World

What is the possible Gaza hostage and ceasefire deal – and what challenges could lie ahead?

Published

3 hours ago

July 6, 2025

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What is the possible Gaza hostage and ceasefire deal - and what challenges could lie ahead?

An Israeli delegation is heading to Qatar for indirect talks with Hamas on a possible hostage and ceasefire deal in Gaza.

The development comes ahead of a meeting between Israeli Prime Minister Benjamin Netanyahu and US President Donald Trump in Washington DC on Monday aimed at pushing forward peace efforts.

The US leader has been increasing pressure on the Israeli government and Hamas to secure a permanent ceasefire and an end to the 21-month-long war in Gaza.

Mr Trump said on Tuesday on social media that Israel had agreed “to the necessary conditions to finalise” a deal on a truce.

And Hamas, which runs the coastal Palestinian territory, said on Friday it has responded to the US-backed proposal in a “positive spirit”.

So what is in the plan?

The plan is for an initial 60-day ceasefire that would include a partial release of hostages held by the militant group in exchange for more humanitarian supplies being allowed into Gaza.

The proposed truce calls for talks on ending the war altogether.

The war in Gaza began after Hamas attacked Israel on 7 October 2023, killing 1,200 people and taking 250 others hostage. Dozens of hostages have since been released or rescued by Israeli forces, while 50 remain in captivity, including about 30 who Israel believes are dead.

The proposal would reportedly see about half of the living hostages and about half of the dead hostages returned to Israel over 60 days, in five separate releases.

Eight living hostages would be freed on the first day and two released on the 50th day, according to an Arab diplomat from one of the mediating countries, it is reported.

Five dead hostages would be returned on the seventh day, five more on the 30th day and eight more on the 60th day.

That would leave 22 hostages still held in Gaza, 10 of them believed to be alive. It is not clear whether Israel or Hamas would determine who is to be released.

Hamas has sought guarantees that the initial truce would lead to a total end to the war and the withdrawal of Israeli troops from Gaza.

A Hamas official has said Mr Trump has guaranteed that the ceasefire will extend beyond 60 days if necessary to reach a peace deal, but there is no confirmation from the US of such a guarantee.

Possible challenges ahead

And in a sign of the potential challenges still facing the two sides, a Palestinian official from a militant group allied with Hamas said concerns remained.

The concerns were over humanitarian aid, passage through the Rafah crossing in southern Israel to Egypt and clarity over a timetable for Israeli troop withdrawals.

Hamas’s “positive” response to the proposal had slightly different wording on three issues around humanitarian aid, the status of the Israeli Defense Forces (IDF) inside Gaza and the language around guarantees beyond the 60-day ceasefire, a source with knowledge of the negotiations revealed.

But the source told Sky News: “Things are looking good.”

The Times of Israel reported Hamas has proposed three amendments to the proposed framework.

According to a source, Hamas wants the agreement to say that talks on a permanent ceasefire will continue until an agreement is reached; that aid will fully resume through mechanisms backed by the United Nations and other international aid organisations; and that the IDF withdraws to positions it maintained before the collapse of the previous ceasefire in March.

Mr Netanyahu’s office said in a statement that changes sought by Hamas to the ceasefire proposal were “not acceptable to Israel”.

However, his office said the delegation would still fly to Qatar to “continue efforts to secure the return of our hostages based on the Qatari proposal that Israel agreed to”.

Another potential challenge is that Mr Netanyahu has repeatedly said Hamas must be disarmed, which is a demand the militant group has so far refused to discuss.

Hamas has said it is willing to free all the hostages in exchange for a full withdrawal of Israeli troops and an end to the war in Gaza.

Israel rejects that offer, saying it will agree to end the war if Hamas surrenders, disarms and goes into exile – something that the group refuses.

Previous negotiations have stalled over Hamas demands of guarantees that further negotiations would lead to the war’s end, while Mr Netanyahu has insisted Israel would resume fighting to ensure the group’s destruction.

US

Texas floods: The victims and people missing that have been named so far

Published

3 hours ago

July 6, 2025

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Texas floods: The victims and people missing that have been named so far

Details of those who have died and those who are missing after US flash floods are slowly emerging – with several young girls among those unaccounted for.

At least 69 people have died from the flooding in Texas, with an unknown number of people – including 11 girls and a counsellor from Camp Mystic in Kerr County – still missing.

As much as 10ins (25cm) of heavy rain fell in just a few hours overnight in central Kerr County on Friday, causing the banks of the Guadalupe River to burst at around 4am local time.

Tributes to those who died, and appeals for those who are still missing, are now being shared.

Who are the victims?

Renee Smajstrla, eight

Renee’s uncle Shawn Salta confirmed the eight-year-old had died, and said she was one of 700 children staying at Camp Mystic.

“Renee has been found and while not the outcome we prayed for, the social media outreach likely assisted the first responders in helping to identify her so quickly,” he said.

“We are thankful she was with her friends and having the time of her life, as evidenced by this picture from yesterday.

“She will forever be living her best life at Camp Mystic.”

Sarah Marsh, eight

Mountain Brook mayor Stewart Welch confirmed the death of eight-year-old Sarah, from Alabama, who was a pupil at Cherokee Bend Elementary.

“This is an unimaginable loss for her family, her school, and our entire community,” he said. “Sarah’s passing is a sorrow shared by all of us, and our hearts are with those who knew and loved her.

“As we grieve alongside the Marsh family, we also remember the many others affected by this tragedy.”

Eloise Peck and Lila Bonner, both nine

Eloise’s mother Missy Peck told local broadcaster FOX4 that her daughter and Lila were best friends and cabinmates at Camp Mystic.

Writing about her daughter on Instagram, Ms Peck said: “She lost her life in the tragic flooding… our family is grieving and processing this unimaginable loss together.”

Lila’s family told NBC Dallas Fort Worth, a local affiliate network of Sky’s US partner network, that they were in “unimaginable grief”, and said: “We ache with all who loved her.”

Janie Hunt, nine

Janie’s family confirmed her death to a reporter from NBC Dallas Fort Worth, who said “her mother tells me she’s devastated”.

Richard ‘Dick’ Eastland, owner of Camp Mystic

Kerr County judge Rob Kelly told the Washington Post that Mr Eastland, who owned the camp died in a helicopter on the way to a Houston hospital.

Local outlet The Kerrville Daily Times reported he was killed while trying to save the girls from the flash floods.

“It doesn’t surprise me at all that his last act of kindness and sacrifice was working to save the lives of campers,” guest columnist Paige Sumner said in the Daily Times’ tribute to Mr Eastland.

Blair and Brooke Harber, 13 and 11

RJ Harber told CNN his daughters died during flooding in Kerr County, saying Blair “was a gifted student and had a generous kind heart”.

He added that Brooke “was like a light in any room, people gravitated to her and she made them laugh and enjoy the moment”.

He also said both his parents were still missing.

Jane Ragsdale, owner of Heart O’ the Hills camp

On Heart O’ the Hills’s website, the camp confirmed it was “right in the path of the flood” along the Guadalupe River.

While there were no campers in residence, Jane Ragsdale died. The camp said: “We at the camp are stunned and deeply saddened by Jane’s death.

“She embodied the spirit of Heart O’ the Hills and was exactly the type of strong, joyful woman that the camp aimed to develop with the girls entrusted to us each summer.”

Julian Ryan, 27

Relatives of Mr Ryan told local news broadcaster KHOU 11 that he died saving his family from floodwaters in Texas Hill County.

They described how he tried to smash a window to help them escape the rising water, but it cut his arm and he bled out before help could arrive.

Who is still missing?

Penny, Emlyn, and Madelyn ‘Emmy’ Jeffrey, 11

Christin Jeffrey Jones posted on Facebook that her parents Penny and Emlyn Jeffrey are missing, as well her niece Madelyn ‘Emmy’ Jeffrey.

She said her family were in Hunt, Texas, and “were spending the night at their cabin on the river at Casa Bonita which is now completely gone”.

“We ask for continued prayers and miracles,” she said. “Please share the word.”

Charlene and Mike Harber, 74 and 76

RJ Harber also told CNN that his parents, Charlene and Mike Harber, are still missing.

He believes the couple have died.

Politics

Another tantrum from the Labour backbenches is inevitable

Published

6 hours ago

July 6, 2025

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Rachel Reeves hints at tax rises in autumn budget after welfare bill U-turn

In common with many parents across the country, here’s a conversation that I have with my young daughter on a semi-regular basis (bear with me, this will take on some political relevance eventually).

Me: “So it’s 15 minutes until your bedtime, you can either have a little bit of TV or do a jigsaw, not both.”

Daughter: “Ummmm, I want to watch TV.”

Me: “That’s fine, but it’s bed after that, you can’t do a jigsaw as well.”

Fast-forward 15 minutes.

Me: “Right, TV off now please, bedtime.”

(Pause)

Daughter: “I want to do a jigsaw.”

Now replace me with the government, the TV and jigsaw options with axing welfare cuts and scrapping the two-child cap, and my daughter with rebellious backbenchers.

Politics latest: Former Labour leader calls for wealth tax on assets above £10m

That is the tension currently present between Downing Street and Labour MPs. And my initial ultimatum is the messaging being pumped out from the government this weekend.

In essence: you’ve had your welfare U-turn, so there’s no money left for the two-child cap to go as well.

As an aside – and before my inbox fills with angry emails lambasting me for using such a crude metaphor for policies that fundamentally alter the lives of some of the most vulnerable in society – yes, I hear you, and that’s part of my point.

For many in Labour, this approach feels like the lives of their constituents are being used in a childish game of horse-trading.

So what can be done?

Well, the government could change the rules.

Altering the fiscal rules is – and will likely remain – an extremely unlikely solution. But as it happens, one of Labour’s proverbial grandparents has just popped round with a different suggestion.

A wealth tax, Lord Neil Kinnock says, is the necessary outcome of the economic restrictions the party has placed on itself.

Ever the Labour storyteller, Lord Kinnock believes this would allow the government to craft a more compelling narrative about whose side this administration is on.

That could be valuable, given one of the big gripes from many backbench critics is that they still don’t really understand what this prime minister stands for – and by extension, what all these “difficult decisions” are in aid of.

The downside is whether it will actually raise much money.

The super-rich may have lots of assets to take a slice from, but they also have expensive lawyers ready to find novel ways to keep their client’s cash away from the prying eyes of the state.

Or, of course, they could just leave – as many are doing already.

In the short term, the future is a bit easier to predict.

If Downing Street is indeed now saying there is no money to scrap the two-child cap (after heavy briefing in the opposite direction just weeks ago), an almighty tantrum from the backbenches is inevitable.

And as every parent knows, the more you give in, the harder it becomes to hold the line.