Obama Warns of ‘Haywire’ Markets If U.S. Debt Ceiling Hit

President Barack Obama warned Congress against using the debt ceiling as leverage in the spending debate, saying “markets could go haywire” and government payments, from Social Security checks to military salaries, will be held up if the limit isn’t raised.

Republican lawmakers “will not collect a ransom” if they delay increasing federal borrowing authority, Obama said today at a White House news conference. “There are no magic tricks here. There are no loopholes. There are no easy outs.”

Obama is seeking to head off a fight with Congress in the coming weeks over raising the $16.4 trillion U.S. debt ceiling as Republican lawmakers consider a government shutdown or default as a means to extract spending cuts. Republican leaders responded by saying that raising the borrowing authority must be linked to spending cuts.

U.S. Treasury bond investors -- who most directly bear the risk of a government default -- aren’t alarmed with yields on long-term U.S. debt near record lows.

Yields on the benchmark 10-year note were down one basis point, or 0.01 percentage point, to 1.86 percent at 12:21 pm New York time.

2011 Debate

When partisan gridlock last brought the government to the brink of default in August 2011, the stock market fell and Standard & Poor’s cut the nation’s credit rating. After House Speaker John Boehner, an Ohio Republican, withdrew from negotiations on July 22, 2011, the S&P 500 Stock Index fell more than 16 percent in the next 11 trading days.

Still, bond investors were unrattled. Yields on 10-year U.S. Treasury notes declined from 2.96 percent on July 22 to 2.56 percent on Aug. 5, 2011, the day of the S&P downgrade. Yields continued to drop, reaching 1.72 percent on Sept. 22 of that year.

The S&P 500 is up 2.93 percent this year. It rose 13.41 percent last year. The index lost 0.2 percent to 1,468.95 at 12:08 p.m. in New York after last week reaching the highest level since December 2007.

The president spoke two days after the U.S. Treasury Department rejected the idea of minting a platinum coin to avoid the debt limit.

Obama and his aides have taken the public position that the White House won’t negotiate with lawmakers over any deal to raise the debt ceiling because the U.S. has no choice other than to pay debts already incurred. That leaves two options: raising the ceiling, or default.

Borrowing Authority

The Treasury reached its statutory borrowing limit on Dec. 31 and is using “extraordinary” measures to pay for the government. It will lack sufficient funds to pay all its bills as early as Feb. 15, according to the Washington-based Bipartisan Policy Center.

Senate Republican leader Mitch McConnell said the debt ceiling debate is the “perfect time” to address spending.

“We are hoping for a new seriousness on the part of the president with regard to the single biggest issue confronting the country and we look forward to working with him to do something about this huge, huge problem,” McConnell, of Kentucky, said in a statement.

Reducing Spending

House Speaker John Boehner, an Ohio Republican, also signaled he wants to tie spending to borrowing authority, saying in a statement that voters “do not support raising the debt ceiling without reducing government spending at the same time.”

The debt ceiling wasn’t included in the end-of-year deal to avert more than $600 billion of spending cuts and tax increases that were set to start taking effect this month.

The prospect of default is threatening to slow the biggest wave of municipal refunding since 1993.

As the U.S. reached its statutory borrowing limit last month, the Treasury Department stopped issuing special securities that usually make it easier and cheaper for localities to refinance higher-cost debt.

With municipal yields falling to 47-year lows, cities and towns bought $138 billion of these State and Local Government Series securities last year, the most since 2005, data from Municipal Market Advisors show.

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