Saturday, June 3, 2023

The market is already asking for about 7% for US bills in full countdown to avoid default Financial markets

Time continues to tick and the Democrats and Republicans still have not reached an agreement that would allow the United States government debt before the beginning of June, the estimated date on which the Treasury will run out of funds to pay its obligations. If there was no agreement, the largest economy in the world would fail, an unprecedented situation in its history – apart from the technical default in 1979 – and unthinkable for a country that is a leader in finance and that has a triple A rating. it also begins to be doubted.

Filch management has decided to downgrade the overall outlook for the US, now triple A. And nervousness is spreading rapidly in the market, something that is reflected in the returns that these days are paid for US treasury bills at the beginning of June. .

-Six-month US bills maturing on June 1 sent their gains to a final 7%, compared to 4.5% at the beginning of the year. One-year bills that mature in June on June 15 are trading at an interest rate of 6.2% and six-month bills that mature in June on June 8, earnings rocket to 6.3%, up to 6.8%. The salt in interest rates demanded by the market is significant, even more so for a country with high debt that is considered a safe harbor. In the financial storm of the European debt crisis of 2012, the Spanish treasury came to pay more than 5% to the bills issued for one year, an all-time high still in force despite interest hikes.

The fear of the market in any case with most convinced investors is that there will be a last-minute political agreement that will avoid a default in the US and with it, an economic disaster with global implications. The Filch administration itself trusts this agreement in the end, although it also warns that the risks of the debt limit not being lifted or suspended before the deadline, an indeterminate date at the beginning of June, have increased, and therefore that the Government. they begin to fail in the payment of certain obligations. Hence, the decision was made to look at the assessment tending towards negativity.

Uncertainty about the debt ceiling has already taken a heavy toll on US solvency in 2011. A last-minute political agreement reached that year did not prevent the S&P agency from lowering the country’s total debt for the first time in its history and withdrawing triple A. top rating

At Fidelity, they warn that the price of the currency “suggests that the risk of a US default in its air is greater now than in the investment around the debt ceiling in 2011”. Along with the acquisition of bills, the price of one-year default risk insurance (CDS) on US sovereign debt has increased from the initial 10 years. Fidelity also provides a probability of agreement of 85% that avoids the suspension of payments. In this case, “the implications from a macroeconomic point of view would be small, but it is expected that there will be an uproar in the market before the agreement and after the announcement,” says the firm.

Once that agreement is reached, and according to eToro, an increase in the debt ceiling could trigger the issuance of up to a trillion dollars in bonds before the end of the fiscal year in September. “This will absorb liquidity and depress other investments, trends that have helped support the market in recent months,” he warns. “Although it is not our baseline mission, in the absence of a negotiated Senate consultation, a drop in US Treasury bonds or even a default cannot be ruled out, which would cause a serious crisis in the markets,” they point out in Deutsche Bank.

Nation World News Desk
Nation World News Desk
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