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Debt ceiling jitters lift US credit default swaps to highest since 2011

Does anyone follow the debt ceiling debate? The deadline is June 2023 and that is less than 2 months away. The default of US treasury is unthinkable. But it came close when S&P downgraded US a treasury from AAA to AA+ while Moody’s and Fitch, have decided not to downgrade the government at this time. Market fell accordingly the following days.
Moody’s and Fitch, have decided not to downgrade the government at this time.

Another piece I read this morning,

Spreads on U.S. five-year credit default swaps - market-based gauges of the risk of a default - widened to 49 basis points, data from S&P Global Market Intelligence showed, more than double the level they stood at in January.
A showdown over U.S. government efforts to raise the $31.4 trillion debt ceiling for the world's largest economy have sent jitters through global financial markets.
JPMorgan said in a note published late Wednesday it expected the debt ceiling to become an issue as early as May, and that the debate over both the ceiling and the federal funding bill would run "dangerously close" to final deadlines.
Debt ceiling jitters lift US credit default swaps to highest since 2011

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Comments

  • Another puzzle is an unusually high spread of 121 bps for 1m-3m T-Bills. April started out with more normal 20 bps spread. Something is fishy with the liquidity.

    Earlier estimates for debt-ceiling drop-dead date were in August, but weak tax receipts may have moved it to June.
  • edited April 2023
    I don't really follow the debt ceiling debate, but with such an un-stabilizing group in Washington I have been trying to prepare for it by the way of increasing my gold percentage. I've been adding periodically in 2023. I don't believe waiting for dips which may never fit your criteria. That can leave you on the side lines. I try to use the old @rono momentum procedure.

    FWIW, I'm to chicken to put a huge percentage into a momentum play, so my ceiling at this point is 10% of my self managed holdings in IAU.
  • @Sven. + 10! “ Does anyone follow the debt ceiling debate?” Thank you for bringing this up. I started a thread in Feb. about default denialism. The country, this board, my family,,, still in denial. X date is getting closer and the government is not getting closer to a resolution. I am starting to consider a major portfolio realignment because I am of an age where I don’t have years to wait for recovery. Problem is I am not at all certain where to hide. I am thinking that with the possibility of an economic slow down increasing and the likelihood of default increasing it might not be a bad time to be out of the market. But where to hide? Anyway,,,,thanks Sven for asking the right question.
  • edited April 2023
    @Sven: "Does anyone follow the debt ceiling debate?"

    Yes, and I'm not very happy with the MSM "gotta compromise" framing of it -- normalizing hostage-taking behavior -- which is giving the hostage-takers oxygen, and probably making a sane resolution less likely.

    For a couple of months now, I've avoided buying T-bills that mature over the summer to limit the damage if the unthinkable happens. It's hard to imagine Treasury not paying off maturing T securities, but there's a first time for everything. On the hedging side, an equity short is all I've got right now, small to start, but the closer we get without a resolution, I may add significantly to it, depending on what the market's doing at the time.
  • @larryB, the market took a dive when treasury was downgraded to AA+.

    @AndyJ, Also there are bullions $ of money market funds invested in treasury. Hard to imagine they will not be affected.
  • the debt ceiling is only an issue to pay previously incurred financial obligations so the GOP is trying to use the leverage to force concessions on stuf that is popular going forward. ( as an aside , I don't comprehend how they can still be trying to claw back budget increases for the IRS. Surely many families, like ours are waiting for refunds from years ago)

    the consequences of a "Default" would be so extreme, so quick to be noticed and so quickly reversed that I am not really worried. It might be possible to trade it, ie buy gold or shorts on SPY or treasuries due in a month, and then sell, but if it is not over in a day or so, you will not be able to buy gas, or food and your investments will be the least of your concern.

    In a rational world the Dems would agree to some concessions in exchange for eliminating the debt ceiling all together.

  • As evidenced by the lack of interest in this discussion, default denialism is indeed real. Maybe the speaker of the house will suddenly care more about the country than his new title and he will get control of the crazy caucus. But not likely.
  • The only solution I see is if 5 or so Republicans who were elected from blue districts cross over to vote with Dems to raise the ceiling… There has been some quiet discussion of this happening. Those folks won’t get re-elected if there is a default so it’s the most likely scenario
  • larryB said:

    As evidenced by the lack of interest in this discussion, default denialism is indeed real. Maybe the speaker of the house will suddenly care more about the country than his new title and he will get control of the crazy caucus. But not likely.

    Actually, I imagine people are far more breathless about this subject than subjects receiving more attention. The problem is that, aside from holding one breath, there is frustratingly very little one can do aside from wishing for the best outcome. How many ways can one define what debt is and point out how stupid it is to base the future of the country on a debt ceiling that flies in the face of the constitutional recognition of debt payment? There will always be past debt and the need for future investments with the debt required. Decay, of course, is an option.
  • @Anna. I appreciate your comments. I think part of the problem is that no one really knows what to do to protect themselves. I have seen advocates for Treasury instruments and avoid them. I have heard Gold but I can’t imagine switching out equities for Gold. I think that my adult kids aren’t giving it much thought but my retiree cohort certainly are. The default will be brought to us by the same outfit that gave us Jan 6 and don’t say gay and no gun laws. So it’s hard to expect rational behavior.
  • @ Mike W. I just said the same thing to my wife. But wouldn’t that cost Kevin the genius his speakership? I agree that he and Jeffries and five patriots could save the day but Kevin would lose his gavel the next day.
  • Default denialism as generally used is the idea that a default wouldn't be harmful. It was discussed to death in 2011 and 2013, e.g.

    American Enterprise Institute - The Foolish Idea of Default Denialism - "A craze is sweeping the nation, the idea that failing to raise the debt limit would not be an abomination." (2013). Also cited by Barry Ritzholtz.

    The lack of responses to your question "where to hide?" is not necessarily due to people viewing a default as a highly improbable hypothetical (even hypotheticals can be useful to consider). Rather you may be getting few responses because IMHO there are no good answers.

    As sma3 expressed, the potential consequences are so extreme that they would either be (if possible) reversed immediately or your question about where to keep investments would become the least of your worries.

    @sven - your links lead right back to your post (message 60984 in this thread). While it is true that the stock market fell following the S&P downgrade in 2011, the Treasury bond market rallied.

    NPR - Developing: In Wake Of S&P Downgrade, U.S. Stocks Tumble (Aug 8, 2011)
    Update at 12:57 p.m. ET. Treasury Bonds Rally:

    The Wall Street Journal reports that despite the S&P downgrade, Treasury bonds are still selling briskly and the 10-year yield has fallen o the lowest level since October:
    The price move underlines the dilemma confronting investors varying from the Chinese central bank to pension funds—there are few alternative safe-haven assets out there that can match the depth and liquidity of the Treasury market, with over $9.3 trillion in debt outstanding.
    As observed in the AEI piece cited above, the bond market fell as actual default neared. But not as a result of any ratings agency actions.
  • The only solution I see is if 5 or so Republicans who were elected from blue districts cross over to vote with Dems to raise the ceiling… There has been some quiet discussion of this happening

    Discussion may have been quiet, but a proposal that would suspend the debt ceiling until the end of the year and includes additional work was announced yesterday by the Problem Solvers Caucus.

    https://problemsolverscaucus.house.gov/media/press-releases/problem-solvers-caucus-endorses-bipartisan-debt-ceiling-framework

    As I understand how this group (evenly divided between Democrats and Republicans) functions, all members commit "to vote for anything that’s endorsed by 75 percent of their caucus". That currently includes 31 House Republicans, well above the 5 or so needed.

    That's likely why the press release states that their proposal "has the support of more than 75% of Problem Solvers Caucus members".
  • Remember that the 2011 downgrade by the S&P came a few days AFTER the debt-ceiling issue had been resolved by the Congress and the President. It seemed that some S&P committee was on a roll to the US downgrade recommendation. Mr McGraw said at the time that things were out of his control/hands. The after-storm not only created a transient market event but also consumed what used to McGraw-Hill at the time. The book/magazine publishing businesses were sold to private equity, and after the trade publications and consumer survey businesses were also sold, the remainder eventually became S&P Global/SPGI (as it is now).

    At the time, the other rating agencies (Moody's/MCO, Fitch) just decided to wait and watch. A concern now is that one of these may now do the downgrade this time.
  • @MSF. thanks for your thoughts. The AEI is not on my reading list. My take on denialism is simply that here and on other boards the very possibility of default is hardly discussed, not that it wouldn’t be horrible. I guess as Martha Reeves would say” nowhere to run to baby, no where to hide.” And that was in 1965.
  • edited April 2023
    This debt ceiling kerfuffle is a manufactured crisis.
    We need to honor our debt obligations for spending previously approved by Congress.
    Spending negotiations should occur during the budget appropriation process.
    The consequences of a default are potentially catastrophic.
    The US dollar's position as the default global reserve currency would be jeopardized.
    So-called "patriots" in the GOP would in effect weaken our nation and aid our adversaries.
    I'm not aware of any effective solutions to protect investors from the worst-case scenario.
    Because of the dire consequences, I believe Congress will lift the debt ceiling (probably at the last minute).
    It's certainly possible that the GOP remains exceedingly obstinate and causes a very short-lived default.
    The excrement will then strike the whirring blades and there will be a tremendous impetus
    to resolve the situation.
  • edited April 2023
    I do think the debt ceiling’s worthy of discussion and I recall a rather lengthy discussion of it earlier this year. But I wonder if from an investor’s perspective it falls into the fat-tail category of an unlikely but extreme risk completely outside our control.

    About the best you can do if you think a default is probable is go to gold, foreign currency or cash. There is something people can do from a political perspective—vote, canvass, call your representatives, organize and protest to make sure these kinds of financial terrorists don’t remain in power or ever get elected again. In some respects, finding an investment solution to this problem for your portfolio is like asking how to prep your portfolio for a nuclear war. We’ve always known the nuclear warheads are there as the ultimate fat tail, but what can you really do to insulate yourself from that risk? The only solution is a mass political one not an individual investment one— throw the bums out of office.
  • @msf, thank for pointing my error. I corrected the link above.
  • I’m wondering what the fat-cat GOP donors are saying to their elected officials? I can’t imagine they’d be happy with the down-grading/destruction of their wealth just to keep low income folks off food stamps.
  • Some of my favorite investments date to the 2011 debacle. I've got dry powder cash ready to go.
  • edited April 2023
    Surprise? Not really: "Republicans’ opening bid to avert economic catastrophe by raising the nation’s borrowing limit focuses more on energy policy than reducing debt." For anyone who's awake, it should be a blow to McCarthy et al.'s credibility, providing an opening to discredit their whole narrative. NYT 4/21.
  • A CDS lottery ticket that nobody wants to win
  • @lewisBraham

    I don't have to write my reps, cause I live in Massachusetts. I agree in theory that democratic actions ( letters, calls, marches campaigning) would work if everyone did it, but only 50% max of the public even votes.

    Most of the reps leading the charge for this crap have been gerrymandered into districts they can't loose.

    My sister in Texas is gerrymandered into a very red district. Her Rep Chip Roy is one of the more extreme GOPers. He refuses to respond to her emails, and will not let anyone but registered Republicans into his town meetings. There are guards at the door checking names off the voter lists.

    Her local school board just voted to require the history teachers to only teach to their students that Trump won the 2020 election and it was stolen.

    Unfortunately I think until the real awful consequences of the debt ceiling refusal really hit the fan nothing will change.



  • @sma3. +100. I live in urban California. My reps are powerless to deal with the crazy crew. And those crazies are beyond reason.
  • @sma3 I know there is significant gerrymandering in certain districts, but the House is a cumulative game. If you lose the worst gerrymandered districts, you go for ones that are better. Never said it would be easy to do this, but it only takes a few extra votes to make the difference between this situation and peace and quiet.
  • edited April 2023
    Larry Summers weighs in on the debt ceiling and the US dollar (among other topics)
    on this week's Wall Street Week episode.

    We should not be taking hostages and making threats which are counterproductive for everybody.
    We do need to have a fundamental conversation about governmental finances.
    Mr. Summers would like the key players - President Biden, majority/minority leaders of House/Senate,
    to recognize that default is unacceptable.
    It's not realistic to think that any meaningful reform will occur when facing debt limit time constraints.

    If the US dollar loses it's status as the global reserve currency, it will be the least of our problems.
    This will happen only if the US is no longer respected or strong in the world.
    Where will people move to?
    The Renminbi is not a viable alternative to the US dollar.
    As a nation we need to focus on our fundamentals and strategy
    and if we're successful the dollar will be ok.
    Summers' Segment
  • edited April 2023
    Delete.
  • Larry Summers is asking for irrational players to behave rationally. Is that possible?
  • Worth reading on fallout for 2024 and target districts: https://nbcnews.com/news/amp/rcna66584
  • @lewisBraham

    You are correct, but when only 50% of eligible voters actually vote, a minority can control a lot of stuff.
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