Wall Street warns of market unreadiness as US Treasury prepares to release a massive wave of bonds
BY BNN NEWSROOM
ABOUT 20 HOURS AGO
The US Treasury is about to release a large number of new bonds to refill its coffers after President J-------n signed a debt ceiling deal into law. This will drain liquidity as bank deposits are used to pay for it, and Wall Street warns that markets aren’t ready for this. The negative impact could be greater than previous standoffs over the debt limit.
What is the debt ceiling deal?
The debt ceiling is the legal limit on how much the federal government can borrow to pay its existing obligations, such as Social Security benefits, military salaries, and interest on the national debt. The US has been relying on extraordinary measures to fund itself in recent months as leaders bickered in Washington. The measure brokered between Biden and House Speaker Kevin McCarthy limits federal spending for two years and suspends the debt ceiling through the 2024 e------n. With default narrowly averted, the Treasury will kick off a borrowing spree that by some Wall Street estimates could top $1 trillion by the end of the third quarter, starting with several Treasury-bill auctions on Monday that total over $170 billion.
Why does it matter for the markets?
The sales will begin on Monday and will affect every asset class as they claim an already shrinking supply of money. JPMorgan Chase & Co. strategist Nikolaos Panigirtzoglou estimates that this flood of Treasuries will have a negative effect on stocks and bonds. The sales will reduce the amount of cash available in the financial system, which could push up interest rates and tighten financial conditions. JPMorgan estimates that a broad measure of liquidity will fall $1.1 trillion from about $25 trillion at the start of 2023.
The concern is valid. The last time the US was at risk of a default in 2011, stock markets had crashed. But a compromise was found at the last minute. We could see something happen along similar lines this time as well. The likelihood of a crash goes up if the current agreement fails and the US government shuts down.
Advertisement
______________________________________________________
How are investors reacting?
Investors are cautiously optimistic that the deal will pass through Congress before the June 5 deadline, but they are also preparing for potential volatility and uncertainty. Some money market funds have reduced their holdings of short-term Treasury bills that mature around the X-date, when the US would run out of money to pay its bills. Others have increased their cash buffers or shifted to longer-term securities.
On the other hand, some investors see an opportunity to buy Treasuries at higher yields, betting that the debt ceiling drama will be resolved and that the economic recovery will support demand for safe assets. They also expect the Federal Reserve to continue its bond-buying program and keep interest rates low for longer.
What are the risks?
Even if the deal is passed in time to avoid a default, credit rating agencies could still downgrade US debt if people lost a significant amount of confidence in the country’s ability to repay its debts on time. That’s what merited the first-ever downgrade of US debt in 2011 by Standard and Poor’s due to a loss in confidence in the country’s ability to repay its debts from months of squabbling among lawmakers. That sent markets sharply lower.
This time around, one of the top credit rating agencies, Fitch, has already placed US debt on rating watch negative, meaning it could lower its AAA rating if it sees a prolonged impasse over the debt ceiling or a deterioration in fiscal outlook.
Another risk is that the agreement, as proposed, prevents the debt ceiling drama from re-occurring until after the next e------n. But that also means that the US will accumulate more debt without any fiscal discipline or reforms. The Congressional Budget Office projects that federal debt held by the public will reach 102% of GDP by 2023, up from 79% before the pandemic.
Advertisement
______________________________________________________
Conclusion
The US Treasury is set to unleash a tsunami of bonds following the debt ceiling deal, which could have significant implications for financial markets and economic activity. Investors are watching closely how lawmakers will vote on the bill and how markets will respond to the surge in supply and demand for Treasuries. The deal may have avoided a default crisis for now, but it also raises questions about the long-term sustainability of US fiscal policy.
Source: BNN
______________________________________________________
If you wish to contact the author of a post, you can send us an email at voyagesoflight@gmail.com and we’ll forward your request to the author (if available). If you have any questions about a post or the website, you may also forward your questions and concerns to the same email address.
______________________________________________________
All articles, videos, and images posted on Dinar Chronicles were submitted by readers and/or handpicked by the site itself for informational and/or entertainment purposes.
Dinar Chronicles is not a registered investment adviser, broker dealer, banker or currency dealer and as such, no information on the website should be construed as investment advice. We do not support, represent or guarantee the completeness, truthfulness, accuracy, or reliability of any content or communications posted on this site. Information posted on this site may or may not be fictitious. We do not intend to and are not providing financial, legal, tax, political or any other advice to readers of this website.
Copyright © Dinar Chronicles
