US debt: The bomb is ticking
Democrats and Republicans have agreed to raise the US debt ceiling by $1.5 trillion. However, markets do not grow by leaps and bounds, and the cost of default insurance (CDS) on US government bonds remains up in the heavens. Why do investors not believe in House Speaker Kevin McCarthy’s bill? It’s all about President Joe Biden’s unwillingness to make concessions, or rather cut government spending. The bottom line is that even if both houses of Congress say “Yes,” the president will veto it. In the meantime, Treasury funds melt into thin air, and the yield on a 13-week Treasury bill approaches 5%. At this rate, Elon Musk’s prediction on the country’s default will come true sooner rather than later. On the other hand, the threat of the US default is far from new. Despite the CDS surge, growing macroeconomic headwinds, and risks of a recession, analysts at Fitch Ratings forecast the US institutional leveraged loan default rate will finish in 2023 at 2-3%. Thus not even 50%, so nothing to worry about yet. What if the curtain does fall? Even if the country fails to pay back its loans on time, it will be a technical default, which means that the debts, including the interest, will be paid. The only question is when. In the worst-case scenario, the country’s credit rating could be lowered, something that could lead to an increase in the cost of borrowing. Speaking of the consequences for the US economy, on the one hand, inflation could fall, and on the other, the threat of recession would be even more obvious against a background of falling borrowing and spending. The retirement accounts of ordinary Americans would also be hit. Moody’s Analytics estimates that real GDP could decline more than 4%, cutting more than 7 million jobs and potentially leaving an unemployment rate of over 8%. On top of that, stock prices could fall by almost a fifth at the worst of the selloff, wiping out $10 trillion in household wealth. In 2011, the political gridlock in Washington over the national debt ceiling sent the S&P 500 down 17%. It took about seven months to recover previous values. If things do not go according to the plan this time, the consequences could be even worse. So is there anywhere to run? For those who believe a default is imminent, there are instruments like the ProShares Trust Ultrashort 20+ Year Treasury ETF, the Rydex Inverse Government Long Bond Fund, and the PowerShares DB US Dollar Bearish Fund. Finally (yet importantly), gold (XAUUSD) could surge.
ChinaGoSmart CGS 
Democrats and Republicans have agreed to raise the US debt ceiling by $1.5 trillion. However, markets do not grow by leaps and bounds, and the cost of default insurance (CDS) on US government bonds remains up in the heavens.
Why do investors not believe in House Speaker Kevin McCarthy’s bill? It’s all about President Joe Biden’s unwillingness to make concessions, or rather cut government spending. The bottom line is that even if both houses of Congress say “Yes,” the president will veto it.
In the meantime, Treasury funds melt into thin air, and the yield on a 13-week Treasury bill approaches 5%. At this rate, Elon Musk’s prediction on the country’s default will come true sooner rather than later. On the other hand, the threat of the US default is far from new.
Despite the CDS surge, growing macroeconomic headwinds, and risks of a recession, analysts at Fitch Ratings forecast the US institutional leveraged loan default rate will finish in 2023 at 2-3%. Thus not even 50%, so nothing to worry about yet.
What if the curtain does fall?
Even if the country fails to pay back its loans on time, it will be a technical default, which means that the debts, including the interest, will be paid. The only question is when. In the worst-case scenario, the country’s credit rating could be lowered, something that could lead to an increase in the cost of borrowing.
Speaking of the consequences for the US economy, on the one hand, inflation could fall, and on the other, the threat of recession would be even more obvious against a background of falling borrowing and spending. The retirement accounts of ordinary Americans would also be hit.
Moody’s Analytics estimates that real GDP could decline more than 4%, cutting more than 7 million jobs and potentially leaving an unemployment rate of over 8%. On top of that, stock prices could fall by almost a fifth at the worst of the selloff, wiping out $10 trillion in household wealth.
In 2011, the political gridlock in Washington over the national debt ceiling sent the S&P 500 down 17%. It took about seven months to recover previous values. If things do not go according to the plan this time, the consequences could be even worse.
So is there anywhere to run?
For those who believe a default is imminent, there are instruments like the ProShares Trust Ultrashort 20+ Year Treasury ETF, the Rydex Inverse Government Long Bond Fund, and the PowerShares DB US Dollar Bearish Fund. Finally (yet importantly), gold (XAUUSD) could surge.
