Sunday, June 4, 2023

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

Time is running out and Democrats and Republicans still have not reached an agreement that would allow the United States government’s debt to increase before the beginning of June, the estimated date at which the Treasury will run out of money for its payment obligations. If there was no agreement, the world’s largest economy would default, a situation unprecedented in its history – except for a technical default in 1979 – and unimaginable for a country that is a leader in world finance and enjoys a triple A rating. Has also started coming under the scanner.

Fitch agency has decided to downgrade the outlook for the US sovereign rating, which is now Triple A. ,

Six-month US bills with a maturity date of June 1 have boosted their profitability to an edge of 7%, compared with 4.5% at the start of the year. One-year bills maturing on June 15 are trading at an interest rate of 6.2% and six-month bills maturing on June 8 have pushed their yield to 6.3%, even as high as 6.8% has reached. The interest rate jump required by the market is remarkable, even more so for a country with sovereign debt considered a safe haven asset. In the financial storm of the 2012 euro area debt crisis, the Spanish Treasury came in to pay more than 5% to issue one-year bills, the highest level ever despite interest rate hikes.

Market nervousness in any case coexists with the confidence of the majority of investors that a last-minute political compromise will be reached that will avoid a default in the US and the accompanying financial disaster with global ramifications. The Fitch agency itself is highly confident of the deal, although it also cautions that the risk that the credit line will not be extended or suspended before the deadline – an uncertain day in early June – has increased, and As a result, the government may start defaulting on payments on some of its obligations. Hence their decision to downgrade the rating outlook to negative.

Uncertainty about the debt ceiling had already taken a severe toll on US solvency in 2011. A last-minute political compromise that year did not prevent the S&P agency from downgrading the country’s sovereign debt rating to triple A for the first time in its history. Highest rating.

At Fidelity they warn that current market prices “suggest that the risk of default on US debt is now higher than it was during the blockade around the debt ceiling in 2011.” The one-year default risk insurance (CDS) on US sovereign debt has multiplied 10 times since the beginning of the year, as the bills’ yield increased. Nevertheless, Fidelity gives an 85% chance that there will be a settlement avoiding the suspension of payments. In this case, “the implications from a macroeconomic perspective will be small, but it is expected that markets will be jittery before the agreement and after the announcement,” the firm says.

Once this agreement is reached, and according to eToro, the increase in the debt limit could increase bond issuance to one trillion dollars before the end of the fiscal year in September. “This will absorb liquidity and displace other investments, reversing trends that have helped keep markets up in recent months,” he warned. “While this is not our baseline scenario, in the absence of a negotiated solution, a downgrade of US Treasury bonds or even a default cannot be ruled out, which would lead to a serious crisis in the markets,” he told Deutsche Bank. point to.

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