Original Article

Washington’s debt limit has Wall Street speculating that the U.S. will use a fallback option to make sure it can pay its lenders if Congress doesn’t raise the borrowing limit before running out of funds.

Some on Wall Street believe the Treasury Department will prioritize payment of bonds if it can’t borrow funds to cover its expenses, with bondholders who own U.S. Treasury debt being the first to receive payments. This assumption is based on records from 2011 and 2013 when the U.S. was close to a debt limit crisis and Treasury officials had laid plans to pay investors first. However, the Biden administration has rejected this idea and is not planning to prioritize debt payments as it does not believe it would prevent an economic crisis and is unsure of its feasibility.

Treasury Secretary Janet L. Yellen has stated that this approach would not avoid a debt default in the eyes of markets. The government hit its debt limit on January 19 and the Treasury Department has said it can use temporary measures until June. After that, the debt limit must be raised or suspended to borrow money to pay its bills.

The odds of Treasury missing a payment are higher than in recent years. The Fed, Treasury, and industry groups have made contingency plans in the past for missed or delayed payments on bonds, including central bank purchases of defaulting bonds. Investors expect a prioritization plan if there is a debt limit breach, but the White House has not acknowledged it publicly. President Biden and Speaker Kevin McCarthy are expected to discuss the debt limit on Wednesday.