Investors get rid of U. S. government debt due to default risks
2023.02.21 02:42
Investors get rid of U. S. government debt due to default risks
By Ray Johnson
Budrigannews.com – Bond investors are beginning to reduce their holdings of U.S. debt in preparation for a highly unlikely but potentially disruptive government default that could have a significant impact on global financial markets.
Last month, the United States Treasury exceeded its borrowing cap of $31.4 trillion. The government may begin to default on bonds that support the global financial system and are regarded as some of the safest investments unless Congress raises or suspends that cap.
Short-term exposure to Treasuries has begun to be adjusted by some bond managers in an effort to avoid losses during a time when the government may not be able to pay its bills. It’s hard to prepare for a default because the Treasury doesn’t know how much money it will get from Americans filing their taxes in April.
The Goldman Sachs Group Inc. The company’s asset management division is reducing its exposure to Treasuries that may be affected by the political impasse.
Ashish Shah, chief investment officer for public investing at Goldman Sachs Asset Management (GSAM), which oversees more than $2 trillion, stated, “You have to be thinking about what instruments you own, what maturities.” If you own a musical instrument like a T-bill, you shouldn’t just let it age; you might want to trade it out.”
Shah stated that during a prolonged period of turmoil in which borrowing negotiations could disrupt markets, investors need to actively manage their positions. Shah asserted that the path taken by the Federal Reserve to raise interest rates further exacerbates the situation.
U.S. Treasury Secretary Janet Yellen stated last month that the government could only pay its bills until early June without increasing the limit. However, some analysts have predicted that the government will run out of cash and borrowing capacity in the third or fourth quarter. The Congressional Budget Office issued a warning that it might take place in July or September.
The yield curve for Treasury bills shows that investors want to hold debt due in August because they think it’s more risky than other maturities.
According to Jonathan Cohn, head of rates trading strategy at Credit Suisse in New York, wider spreads between Treasury bill yields and matched-maturity overnight index swap (OIS) rates in mid-August reflect views that bills maturing then carry a higher risk of a missed payment.
He stated that “a kink (in the Treasury bill curve) has become evident through the middle of August where the latest 6-month bill issues mature.”
In the past ten years, disagreements regarding the debt limit have largely been resolved without causing significant financial turmoil. However, a compromise with Democratic President Joe Biden could be met with resistance from Republican lawmakers in the United States House of Representatives, which could tumult markets.
Investors in bonds are dealing with uncertainty regarding the so-called X-date, when the government will no longer be able to make its payments. An actual default is thought to be an event that has a low chance but could have a big impact. It has the potential to shake up global markets and drive up borrowing costs for businesses and the government of the United States.
Ed Al-Hussainy, senior interest rate strategist at Columbia Threadneedle, stated, “The probability of a default is very low, but I’m okay telling my clients to avoid T bills with a six-month maturity… That is probably the most concrete way that we’re approaching this.”
Al-Hussainy said that he might also buy Japanese yen because, in the event that the United States defaulted, investors would likely look for protection in other currencies, which would challenge the dollar’s status as a safe haven.
