The United States is keeping world financial markets on edge. The fluctuations in the negotiation on the debt ceiling have already begun to weigh on investor sentiment when there is less than a week left for day X. The name refers to June 1, the day on which the problems of Liquidity for the US Treasury will begin to flourish unless Republicans and Democrats come to an understanding before then.
Until a few days ago, the market remained relatively calm, under the premise that they are used to agreements of a political nature being reached ‘in extremis’. However, something began to change at the end of last week, when the messages that were transmitted from both sides that the pact was close have turned into a blockade that seems to have no way out. The first wake-up call has come from the rating agencies after Fitch and DBRS rated long-term debt in the United States, while doubts escalate in fixed income.
The focus of greatest tension at the present time is in the very short-term debt, the T-Bills or letters, in which the tranches of less than one year have settled above 5%, levels that have not been seen since February 2007, in the moments before the financial crisis. One of the most significant jumps is in one-month debt, whose profitability navigates unprecedented ranges. Its yield -which moves inversely to the price- reached over 6% on Thursday morning but then took a breather throughout the day to de-escalate to 5.7%, two percentage points above the levels of the long term.
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In yesterday’s session, the yield on the ten-year American bond fluctuated at 3.57%. In his case, this barrier with which he has flirted several times throughout 2023, as well as at the end of 2022, places him at 2014 highs. In long-term returns, the rise has been barely three tenths in the last month, while on paper for one month they have shot up by 140 basis points. Everything indicates that short-term bonds will continue to rise as the date approaches.
“The key lies in the actions of the Federal Reserve with respect to interest rate increases,” the partner of Luna & Sevilla Asesores Patrimoniales, José María Luna, told this outlet, while stressing that his decision on interest rates interest has greater effects on short tranches of debt. Although the latest Fed minutes show a greater inclination towards the expected pause in the reference money rates, the statements of James Bullard, president of the bank of the Fed of San Luis and considered one of the hawks, with which bets for two more increases to control inflation, they do not help to relax the pressures on the debt.
The inversion of the interest rate curve -in situations of economic normality the long term moves above- traditionally tends to be seen by analysts as an indicator that a recession is coming. Apart from the fact that activity in this economic powerhouse has begun to show signs of cooling off in the first quarter of the year, but unemployment has not, and that the Reserve defaults on credit in the US, which measure the risk of default by the US Government, they have deflated slightly, but without escaping the volatility.
Although Most Analysts Cling to the fact that Default Has Never Occurred in Recent Country History and that the Probability of It Now Happening is Low, the Precedent of 2011, When S&P Downgraded the Credit Rating After the Deal Closed two days before the deadline, serves as a reminder. In this sense, the Deutsche Bank analysts focus on the fact that the current Treasury bond market is 2.5 times larger than it was twelve years ago, as well as the repo market, which at that time “was practically non-existent.” “This means that the stakes are higher this time,” they warn.
It should not be forgotten that the federal budget ranges from the payment of pensions or military payrolls to the interest on the debt, which represents around 8.6% of the annual accounts for this year, so it is not possible to reach an understanding within of a divided Congress, would also question “the ability of the largest economy in the world to continue issuing debt”, they remark from Deutsche Bank. “The political maneuvers of both parties in the belief that the other will commit first to avoid an economic disaster are increasing market volatility and strongly pushing the world economy into unknown territory,” they add, while specifying that investors only they will breathe a sigh of relief when the new deal hits Biden’s table.