Investors on Wall Street are bracing for the prospect of a protracted, costly standoff in Washington over the debt ceiling, underscoring the economic risks as House Republicans prepare to vote on new legislation as soon as Wednesday.

In recent weeks, two key developments — including a drop in yields on government bonds set to mature imminently — have suggested a growing panic that the GOP’s demands could cause the country to default, touching off what analysts widely believe would be another U.S. recession.

The uncertainty has added to the challenge facing House Speaker Kevin McCarthy (R-Calif.) as he looks to assuage some Republicans’ last-minute reservations over a bill that Democrats uniformly oppose. The GOP proposal would slash federal spending dramatically and unwind some of President Biden’s top priorities, including student debt cancellation, in exchange for an increase in the debt ceiling — the statutory cap on how much the U.S. government can borrow to pay its bills.

With no resolution in sight — and the deadline drawing closer by the day — some on Wall Street have started to contemplate the possibility of a default. Joseph Brusuelas, the principal and chief economist at RSM, an accounting firm, said this week that “financial markets are now moving to begin pricing in the more difficult portion of the gridlock over the debt ceiling,” adding that the uncertain state of the economy has left some investors “on edge.”

The financial turbulence highlights the stakes in the nation’s capital, more than a decade after Republicans last used the debt ceiling as leverage to seek spending cuts. That 2011 fight — between ascendant, conservative tea-party Republicans and President Barack Obama — rattled the stock market, precipitated a downgrade in U.S. credit and ultimately cost taxpayers more than $1 billion.

This year, McCarthy has maintained that Republicans hope to avoid default. In a speech at the New York Stock Exchange last week, he blamed Biden, who has refused to negotiate out of a belief that the debt ceiling should be raised without conditions to prevent any disruptions to the fragile U.S. economy.

Two days later, McCarthy unveiled legislation that he said would preserve U.S. credit and slow the accumulation of debt. The so-called Limit, Save, Grow Act of 2023 would cap federal agency spending over the next decade, achieving more than $3 trillion in savings, according to GOP estimates. It would also repeal key climate investments and impose new work requirements on recipients of federal aid, including Medicaid.

But McCarthy still must cobble together the necessary 218 votes for it to pass — no easy feat for a narrow majority of 222 members long troubled by its own ideological divisions. By Monday evening, the party appeared to have about a half-dozen remaining holdouts, whose opposition could scuttle the bill, since Republicans only have four votes to spare.

Some moderate Republicans, including Rep. Nancy Mace (R-S.C.), have signaled early unease that the GOP plan could hurt their districts, particularly by rolling back tax credits to boost solar energy. Conservatives, meanwhile, have demanded that McCarthy and other Republican leaders commit to holding their ground and resisting any changes that weaken the bill in the Senate, where Democrats say they’ll refuse to consider the GOP legislation.

“This is the bare minimum for me and a host of other people,” said Rep. Ralph Norman (R-S.C.), a top member of the far-right House Freedom Caucus, estimating there are four lawmakers in his ranks that are “leaning no” until they can secure hard commitments from McCarthy.

On Tuesday, the House Rules Committee plans to take the first procedural step toward starting debate on the chamber floor. Lawmakers could vote on the bill as soon as Wednesday, a timeline that prompted some Republicans to express a note of confidence about their odds for success.

“Speaker McCarthy’s been at the table. And he has offered to negotiate with the president. Now we’re going to put our terms on a piece of paper, get 218 Republicans, and we’re going to put the ball in their court,” said Rep. Jodey Arrington (R-Texas), the leader of the House Budget Committee, in an interview on Fox News.

But the precarious political environment has not been lost on Wall Street, where investors began to raise alarms shortly after McCarthy’s speech. The primary source of their concern was federal tax collections: In the days before 2022 returns were due, analysts began to notice that tax receipts had come in lower than anticipated.

The drop carries immense implications for the debt ceiling deadline, known in Washington as the “x-date,” since it helps determine how long the United States can use a mix of its own revenue and special budgetary maneuvers to stave off a default. The Treasury Department is expected to release a more complete analysis next month, reflecting taxes collected through the April 18 filing deadline.

“There’s nothing like the sight of the gallows to concentrate the mind. That could cause the conversation to become more serious,” said David Kelly, the head of the Global Market Insights Strategy Team for J.P. Morgan Asset Management.

In an ominous note last week, analysts at Goldman Sachs said the tax shortfall could shorten the timeline for action — meaning the government could run out of options in July, though they could not rule out a deadline as soon as early June. That could unleash an urgent scramble on Capitol Hill, where some lawmakers had been counting on the possibility they had until as late as September.

“We think that non-withheld tax receipts so far still lean slightly in favor of a late July deadline, but it would take only a few days of slightly weaker tax collections to tip the deadline to early June,” the analysts at Goldman Sachs wrote in their April 19 note.

In response, investors have started to shift their behavior. Some have avoided Treasury bills — bonds issued by the federal government — that mature around the likely debt ceiling deadline. In its own note last week, analysts at J.P. Morgan noted that yields on a three-month Treasury bill have spiked, while one-month yields have plummeted, a gap they noted is the “widest in over 20 years.” Historically, those yields tend to move in concert, so the gap may reflect investors’ fear about a default over the summer.

“We expect these oddities to continue as policymakers work out the kinks to reassure investors of the soundness of short-term government debt,” the bank found.

Other analysts saw early cause for concern in the price of sovereign credit default swaps — essentially, a hedge against a default on U.S. government debt, which would pay out if the government does fail to pay bond interest. Prices are “substantially more” than they were at the last debt ceiling crisis in 2011, according to a new analysis by Mark Zandi, the chief economist at Moody’s Analytics, published late Monday.

Zandi cautioned the market is an imperfect gauge of investor sentiment, particularly given the role of hedge funds in placing such bets. Still, his report found that global investors “appear to be attaching non-zero odds that the debt limit drama will end with a default sometime in June or July.” He also warned that the adoption of the GOP proposal could carry its own adverse effects, potentially reducing gross domestic product by 0.65% by the end of the fourth quarter of 2024.

Seizing on the findings, White House press secretary Karine Jean-Pierre said in a statement that the GOP bill would “cut the American economy off at the knees.”

“President Biden believes we should be investing in America to revitalize American manufacturing,” she added, “not holding our economy hostage over disastrous proposals that would lead hundreds of thousands of Americans to lose their jobs.”