The ‘x day’ for the United States is drawing near. On June 1, the US government will run out of reserves to meet its financial obligations. A date marked on the calendar that has turned all the eyes of the market towards this country with time running against it. Although the meeting held this Tuesday between the Prime Minister, Joe Biden, and the leader of the Republican party in Congress, Kevin McCarthy, ended without an agreement, both parties have tried to convey a message of optimism and see it as feasible to approach positions. At the moment, the only thing he agrees on is that defaulting on the debt “is not an option.”
The most recent precedent is in 2011, when Biden was vice president of Barack Obama. Negotiations were reached ‘in extremis’ at the beginning of August, when they lasted hours before the deadline, with a high cost for the US financial market, which was already prepared for a possible default. One of the most immediate consequences was the downgrade of the credit rating by the S&P agency from AAA to AA+ with a negative outlook, something unprecedented in more than seven decades until then. The safest debt in the world was valued below countries like Germany, France or the United Kingdom. This was reflected in the stock markets, in which the S&P500 dropped more than 6.6% in one day, in line with the Dow Jones (-5.5%) and the Nasdaq (-6.9%) in the day after that advertisement.
However, these falls are occurring months ago. The Dow Jones Industrials, the most representative index of the US economy, accumulated a drop of around 14% between June and September 2011, breaking the streak of increases recorded during the first five months of that year. The debt market will also not escape the turbulence with dizzying movements in the shortest tranches that ranged from a 101% rebound during the last week of July and a consequent drop in its price, to plummeting 71% and rising again by 54% in the two successive weeks.
Notably, this volatility occurred while the yield was moving below 0.1%. In fact, in the two-year tranche, which also fluctuated at low levels compared to the current moment, up to around 0.3%, the variations were in double digits, but somewhat lower. For its part, the reference to ten years occurred between the end of July and mid-August a decrease of seven tenths, from 2.7 to 2%. “The market reaction was linked to a severe loss of confidence, with US Treasuries rebounding despite the downgrade, safe haven currencies outperforming and credit spreads widening,” said the head of fixed income. Schroders global and currencies, Paul Grainger, who while defending that history can “be a useful guide”, stresses that the market environment was very different from today.
“History shows that volatility increases as the date approaches. (…) different implications for the shape of the curve In 2011, the risk revolved around flattening the curve,” Grainger says. Twelve years ago, the reference money rate in the US was in the target range of 0% and 0.25%, the level at which they have remained since December 2008. The current scenario is not comparable after the Fed recently executed a rise of 25 basis points, to 5.25%, while market expectations grow that the expansive monetary cycle is nearing its end.
3.5%, while in the two-year debt it reaches 4.1% and 5.26 in the six-month debt. Víctor Alvargonzález, strategy director of the independent advisory firm Nextep Finance, indicates that this inversion of the yield curve is more due to an increase in the probability of recession. Although he is confident that a last-minute pact will be negotiated, he warns that “we must be prepared for any scenario” given the increase in political polarization in the US. “Analysts don’t discount a ‘default’ because they don’t expect politicians to be so irresponsible as not to reach an agreement,” he qualifies.
From Rent 4 Natalia Aguirre 89 times. Another of the significant differences with 2011 is that at that time the debt ceiling, that is, the limit that the State could spend, amounted to 14,300 million dollars. This figure represents less than half of the maximum indebtedness of public debt that the State can incur, which amounts to 31.4 billion dollars.
The US Treasury Secretary, Janet Yellen, has intensified the pressure with an increasingly aggressive tone about the effects on the economy of failing to raise the aforementioned ceiling, which could result in an economic and financial catastrophe. The most imminent effect would be that some 66 million pensioners would stop collecting their pension, around eight million workers would remain unemployed and the stock markets would suffer an estimated 45% bump. “It is probable that some extension will be granted to allow a more meaningful negotiation. Although this could provide a period of relief to the markets, it will not be the end of the story and uncertainty is likely to persist,” they remark from Schroders, at the same time that indicate that a deterioration in confidence would translate into a slowdown in global growth. Proof of cotton is in the VIX index, seen as an indicator of fear among investors, which is at a decade low after deflating to 17 points past dark clouds among retail banks.