I’ve come this far.
Because of the debt ceiling crisis, the U.S. government They will become riskier borrowers in the next month or so than Bulgaria, Croatia, Greece, Mexico, the Philippines and many others never before considered cornerstones of the modern global financial system. .
Don’t get me wrong. I own Treasuries in my personal portfolio, but with one notable exception, so far investors around the world have abandoned Treasuries, and for that matter the U.S. dollar and the U.S. stock market. There are no signs to. The United States is, and we expect to continue to be, the center of global finance.
important but often overlooked sectors of financial markets, $30 trillion credit default swap market — states that the debt ceiling conflict is really serious. Currently, the short-term cost of insurance against default in the United States is skyrocketing.
Moreover, there are already signs that the Washington government’s regular flirtation with defaulting on its debts is having a subtle long-term negative impact on global markets.
Treasury Secretary Janet L. Yellen said: Said If the U.S. defaulted, it would be “an economic and financial catastrophe of its own.” Every catastrophe has a cost, and the market has a hard time assessing it.
stalemate
President Biden began talks with Chairman Kevin McCarthy and other congressional leaders about the debt ceiling, but little progress has been made. At this rate, the Treasury Department says it will run out of “temporary measures” and hit the debt ceiling sometime in June. If Congress doesn’t act by then, U.S. funding could dry up. Bills, including millions of Social Security checks, could be stopped and defaulted for the first time.
The stock market is eyeing other issues, including persistent inflation, high interest rates, bank failures, the possibility of an imminent recession, and the Federal Reserve’s intentions of tightening monetary policy for more than a year. However, if the debt ceiling problem is not resolved until the last minute, it is no surprise that the stock market will plummet. Something similar has happened before, even though no actual default occurred. After all, the stock market recovered.
Government bonds are generally considered the safest investment. However, the market now sees one-month Treasury Bills, which mature in June, as a potential problem. Yields on them have surged over the past week or two, outpacing yields on two- and three-month bonds. that’s not typical.
Logically, within a few months the debt ceiling crisis will be gone. On the other hand, monthly bills carry unusual risks. But some investors, like then-“bond king” William H. Gross, who headed Pimco, believe a default will be avoided and that at current prices the one-month Treasury short-term Claims the securities are cheap.
That may be true, but only because they are considered dangerous. But U.S. Treasuries should be risk-free assets. One might argue that there would be no safe place to go if the US Treasury defaulted, as virtually all financial assets on the planet are priced in relation to US Treasuries. In such circumstances, it is difficult to assess the safety of anything in the financial world.
default insurance
Short-term Treasuries aren’t the only asset class directly affected by the US debt ceiling. Concerns have also surfaced in the credit default swap market. This is a playground for well-heeled institutional investors, such as hedge funds, banks, and pension funds, and not a place I usually spend a lot of time thinking about. But credit default swaps provide insight into the unwarranted damage Washington’s political dysfunction is doing to US credit.
Consider a credit default swap as follows: essentially insurance. Investors can obtain protection against losses due to corporate or government defaults for a specified period of time. The United States remains the world’s financial powerhouse. However, until 2011, it was also included in a select group of countries with the highest credit ratings in the world. That year, however, Standard & Poor’s downgraded the company’s credit rating by one notch, citing the debt ceiling issue.
Germany, on the other hand, still has a pure triple-A credit rating. No wonder Germany is seen as a better credit risk country, even if it is less influential than the US. But it’s amazing how true it is now.
“If you look at the credit default swap market, you can see how much the US has been hit by the debt ceiling crisis.” Said Former Merrill Lynch chief investment strategist Richard Bernstein, who runs his own firm, said: Richard Bernstein Advisor.
I saw While the likelihood of an actual default is still low, insurance costs for US Treasuries over the next 12 months were about 50 times higher than in Germany and about 3-7 times higher than in countries such as Bulgaria, Croatia, Greece, Mexico, and Mexico. Philippines. According to FactSet data. Over the long term of 3, 5 and 10 years, the cost of insurance against default in the US will fall.
As you can imagine, over the long term the US is considered safer than countries with lower credit ratings, yet insuring US debt is still about three times more expensive than Germany. Bernstein also noted that yields on German government bonds are generally lower than those on government bonds. There are many reasons for this, but one important one is the safety of German bunds. “Even if resolved, these debt crises leave the United States at a long-term competitive disadvantage,” he said.
longer view
in his latest annual letter Warren Buffett has told Berkshire Hathaway shareholders that he is optimistic about America’s financial future.
“Despite the public’s penchant for self-criticism and self-doubt, almost enthusiasm, I have yet to see a time when it makes sense to make long-term bets against the United States,” he said. Told.
I share that optimism too, but I confess to being worried. The debt ceiling crisis is a symptom of political dysfunction. Oddly enough, even though the United States has the capacity to service its debt, it may not be able to do so due to its inability to reach a political agreement.
So what should we do?
Like Buffett, many people should invest long-term in low-cost index funds. But I am not entirely certain that the United States will act in its own best interests. So, unlike Buffett, I believe investors should own stocks and bonds all over the world, not just in the US. I hedge long and short term bets.
Over the next month or two, I will strengthen my relatively safe cash holdings in government money market funds and federally insured savings accounts. There are no completely safe options if the US defaults, but we cannot find a better one.
That’s the strange thing. In the event of a crisis, even one caused by the United States, investors tend to seek refuge in US Treasuries. That happened in 2011 and will continue to happen until America finally loses its luster.
For now, be careful with your money. And I hope elected officials can fully maintain the trust and credit of America.
