Markets are starting to get worried about the debt ceiling
The US debt limit was breached in January, and now there is a nail-biting game of debt ceiling squabbling as the shot clock is winding down.
New York CNN
The financial markets would have you believe that the US debt ceiling was breached back in January. This is starting to change as the clock ticks down on what's shaping up to be an exciting game of debt-ceiling squabbles.
Treasury Secretary Janet Yellen warned in January that if lawmakers do not raise the country's borrowing limits by June, they risk the federal government defaulting on their debt obligations. Moody's chief economic said that this would be disastrous for the economy, and millions of jobs could be at risk.
The markets aren't ignoring that.
Investors demand historically high yields on US Treasury notes due in July. Some estimates predict that the United States would default if no legislative action is taken. This would mean that bondholders wouldn't get paid on time.
The yields on three-month Treasury bills closed at 5.1% on Thursday. This was higher than the yields on longer-term Treasury Notes.
Bonds that have a longer maturity date tend to pay a higher rate of interest to compensate investors who lock in their money for an extended period. The interest rate path is also uncertain during this time.
When the yields of shorter-term debt exceed those of long-term debt, it is often an indication that economic trouble will soon follow.
Spreads on US 5-year credit default swaps have also widened by 50 basis points according to S&P Global Market Intelligence. Five-year CDS were hovering around 35 basis points when the debt ceiling breached.
A bondholder who purchases a credit-default swap is guaranteed to get the money owed them in the event of a default by the bond issuer. When the likelihood of default increases, credit default swaps become more expensive.
What is the comparison to the 2011 Debt Ceiling Debacle?
Standard and Poors, the credit rating agency, downgraded US debt in 2011 from AAA to AA+, which was the highest possible rating.
The cost of insurance against US debt increased to 63 basis point after that. This is a far cry from the current costs, which have recently risen above 100 basis points according to Refinitiv.
In 2011, short-term bonds had yields that were significantly lower. The yields on Treasury notes for three months peaked in August at 1.1%, just before the lawmakers reached agreement to raise debt ceiling. During the negotiations, yields on longer-term debt exceeded those of shorter-term debt.
The US markets weigh in on more issues than the possibility of a US default on its debt. After recent bank failures, the banking sector remains unstable, despite its stability. The Federal Reserve has not yet reached its 2% inflation target. This is causing the Fed to raise interest rates, which will likely push the economy back into recession.