Yellen warns of no viable solutions to debt ceiling stalemate

Treasury Secretary cautions against Biden taking unilateral action as Senate Republicans hold firm

By Ahmed Azzam | @3zzamous | 3 July 2023

  • Mixed trading in Asian markets after US stocks rallied on Friday.

  • James Bullard waits for data before deciding on Fed rate move in June.

  • Janet Yellen warns against unilateral action on debt ceiling stalemate.

  • Bond traders uncertain about potential Fed policy shift.

What’s happened?

Asian markets saw mixed trading on Monday after US stocks rallied on Friday, despite a tumultuous week on Wall Street. The S&P 500 futures were slightly lower while South Korea and Australia experienced gains. Japan's market fluctuated throughout the day. The UK markets were closed in observance of a holiday.

Meanwhile, treasuries, the dollar, oil, and gold remained stable with little change in value.

In other news, St. Louis branch chief James Bullard predicted that the Federal Reserve may need to raise rates, but he is waiting to see more data before deciding on a move to support in June. Bullard noted that the aggressive policies pursued over the last 15 months have helped to stem inflation, but it is not yet clear if the economy is on track to reach the target of 2%.

What to watch?

Janet Yellen, the US Treasury Secretary, has issued a warning that there are no viable solutions to the debt limit stalemate other than Congress lifting the cap. She made the statement as Senate Republicans continued to hold firm on the issue. Yellen also cautioned that President Joe Biden taking unilateral action would result in a constitutional crisis.

The Treasury Secretary's remarks followed a statement from 43 GOP senators, led by Mitch McConnell, stating that they would oppose raising the ceiling without spending cuts. The impasse has caused widespread concern among investors, who fear that a default could have severe economic consequences.

Meanwhile, bond traders remain uncertain about a potential shift in Federal Reserve policy. The surprisingly strong US jobs data released on Friday washed out most bets on a July rate cut. However, rate derivatives still anticipate a 25-bp reduction by September and a total of three cuts by the end of the year.

The five-year Treasury yield has been volatile in recent days, moving up or down 15 bps in a single day on three separate occasions last week. The yield fell to as low as 3.20% before ending around 3.41%.