Hoping That Congress Maintains the US's Full Confidence and Credit

by Wall Street Rebel - Michael London | 05/12/2023 10:04 AM

The current debt ceiling crisis has resulted in the United States government being perceived as a more precarious borrower in the upcoming month compared to other countries that have not traditionally been regarded as key players in the contemporary global financial system.

The United States' national debt has emerged as a pivotal factor in the country's economic landscape. Treasury bonds are widely regarded as the most secure investment option and serve as the standard against which numerous components of the financial system are measured. Moody's and other economists have asserted that a default could potentially result in a recession in the United States.

The financial markets encompass a significant aspect often overlooked - the $30 trillion market for credit default swaps. The costs of insuring against a potential debt default by the United States have significantly increased in the short term. This market indicates that the impasse over the debt limit is a crucial matter that should not be ignored.

Furthermore, there are indications that Washington's occasional tendencies to consider debt default are already causing slight adverse effects on global markets in the long run. These effects are anticipated to become increasingly noticeable in the years ahead.

Secretary of the Treasury Janet L. Yellen has warned that if the United States defaults on its debt, it will result in an economic and financial catastrophe that would be entirely self-inflicted. The financial markets face difficulty accurately assessing the expenses related to different disasters.

The President Biden has initiated discussions with Speaker Kevin McCarthy and other legislative leaders regarding the possibility of raising the debt limit. However, progress has been limited thus far. Based on current information, it appears that the Treasury will exhaust its reserve of "extraordinary measures" and hit the national debt ceiling at some point in June. If Congress fails to take any action, there is a possibility that the United States may face a financial crisis. There is a possibility that the organization may stop paying its bills, resulting in the non-payment of millions of Social Security checks and a potential default on its debt.

The Federal Reserve has been tightening financial conditions for over a year now. The stock market has been primarily concerned with various issues, including persistent inflation, rising interest rates, bank failures, the possibility of an upcoming recession, and the intentions of the Federal Reserve. If the disagreement regarding raising the debt limit persists until the deadline, it would not be unexpected to see a notable decline in the stock market. This has happened before, even when there wasn't an actual default. The stock market was able to recover in a timely manner.

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Most investors still believe that purchasing Treasuries is the safest investment choice. The Treasury notes with a maturity of one month coming due in June are being blamed for the possibility of market turmoil. Yields have seen a large increase over the last week and are now higher than the rates of two- and three-month bills combined. This development occurred throughout the previous week. This is not the traditional order in which things would occur.

Based on this specific line of thinking, it is predicted that the existing problem with the debt limit will be settled within a time, somewhere between two and three months. In the meanwhile, bills with a due date of one month create their own set of challenges. William H. Gross, who was once known as the "bond king" during his employment at Pimco, thinks that a possible default is unlikely to take place, which is in contrast to the fears that certain investors hold over the possibility of such an occurrence. In addition, he argues that the current interest rates on one-month Treasury notes make them an attractive investment choice at present.

However, their categorization as such is only attributable to the fact that they have the potential to pose hazards and dangers. It is conceivable that they contain such qualities, but this is not true. However, there is a widespread misconception that investments in Treasuries do not involve any risk; can you confirm this is the case? It is possible to make the case that the pricing of practically all global financial assets is proportional to that of Treasuries. This is something that may be argued. Therefore, if the United States Treasury becomes bankrupt, a secure location to store one's financial assets could not be easily accessible. Given these conditions, it is very difficult to determine the degree of safety that can be ascribed to any one component of the financial system.

Despite this, the United States government's ability to borrow money will have a direct influence not just on short-term Treasuries but also on other asset classes. Concerning the credit default swaps market, there has been an increase in recent times in the amount of fear. The above stated domain is set aside only for the use of substantial institutional investors, such as banks, hedge funds, pension funds, and other such organizations. It is not the kind of topic that generally requires a significant percentage of my attention and mental capacity from me. Credit default swaps can shed light on the negative effect of Washington's political dysfunction on the creditworthiness of the United States.

It is essential to keep in mind that credit default swaps, at their core, are just another kind of insurance. Investors can receive protection against financial losses that may be incurred as a result of a possible default on debt by either a governmental body or a business organization for a period of time that is determined. This protection may be obtained for a certain amount of time. The United States of America continues to be the most important driving force behind the economy of the rest of the globe. Before 2011, the nation in question was part of an exclusive club of countries that shared the world's top credit rating. Just a few countries previously held this honor. Standard & Poor's cut the United States' credit rating by one notch in the same year that the impasse over the debt ceiling continued, citing this as the primary reason for the reduction.

On the other hand, Germany's credit rating has not suffered any damage and remains unblemished at the highest possible level of triple-A. Despite having a lesser degree of global impact than the United States, it is not unexpected that Germany is seen as having a bigger credit risk than other countries.

The insurance price for United States bonds for the following year was more than fifty times more than that of German bonds and between three and eight times higher than the insurance cost for bonds produced in nations such as Greece, Mexico, and the Philippines. In other words, the insurance cost for United States bonds was significantly higher than that for bonds issued in those countries. Even considering the present state of affairs, the likelihood of a real default on the debt is still rather moderate at best. The figures that were acquired from FactSet provide credence to the assumption above. The cost of insurance against a prospective default by the United States demonstrates a downward trend across prolonged time horizons such as three, five, and ten years.

Over longer time horizons, it is reasonable to hypothesize that the United States will be seen as a safer country compared to nations with lower credit ratings. Despite this, the cost of debt insurance in the United States is still around three times higher than in Germany. Mr. Bernstein claims that the interest rates attached to German government bonds are, on average, lower than those attached to U.S. Treasury bonds.

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The event above occurred in the year 2011 and is anticipated to persist unless the United States experiences a decline in its appeal. That is an unusual occurrence. During times of crisis, including those instigated by the United States, investors typically seek a safe haven in Treasuries.

At present, it is advisable to exercise caution in managing personal finances and rely on the assurance that elected officials will uphold the complete trust and financial credibility of the United States. Put the country above your petty politcics.