There are growing concerns among investors that
the United States may default on its debt, with
demand for debt insurance soaring and demand for
US Treasury bills plummeting. The Congressional
Budget Office has warned that the US could fail to
meet its obligations as early as July of this year,
creating anxiety among investors as the deadline
approaches.
One of the most traded forms of debt insurance,
five-year credit default swaps on US government
debt, has reached its highest price since 2012. This
reflects investors' desire to protect themselves
against the potential default of debt. At the same
time, demand for US Treasury bills has declined,
indicating that investors are turning away from
government-issued debt as the standoff over raising
the debt ceiling continues. Prices for Treasury bills
that expire in late summer, around the time a debt
default could potentially occur, have fallen below
those of other short-term debt instruments.
While experts say that a debt default is unlikely,
such an event would be potentially catastrophic for
markets. US Treasury Secretary Janet Yellen has
warned that a debt default would be "unthinkable"
and could spark a financial crisis as bond holders,
businesses, and foreign governments sell their
holdings, causing liquidity problems.
Time is running out for policymakers, who are
holding out as they debate possible spending cuts as
a condition for raising the debt ceiling. The
Congressional Budget Office projects that the X-
date, when the US will fail to meet its debt
obligations, could fall between July and September
of 2023. In the meantime, the US Treasury has
implemented "extraordinary measures" to ensure
that the government can continue to meet its
obligations, staving off an immediate crisis.
There are reports that House Republicans are
creating a debt ceiling package and could be close
to striking a deal with Democrats. However, the
proposal reportedly includes significant spending
cuts, including banning items on the Democrats'
agenda like student loan forgiveness. Despite the
challenges, policymakers must come together to
raise the debt ceiling and avoid a potentially
catastrophic default on US debt.
Social Plugin