We have seen it before
Since 1960, the US has resolved debt limit issues 78 times. Biden thinks he can get away easily too – he has added $3t to US debt since Jan 2021. But this year Republicans run the House and are leveraging their right to veto. They want Biden to reduce spending or the US will default. Both parties sound tough but House Speaker McCarthy (Rep) on May 17 said it is possible to reach a deal by the end of the week. If US defaults, could Biden win the next election?
We think a default, if it happens, would be technical in nature. If the issue is going to be resolved, what could happen to the market? The last debt ceiling drama was in 2011 during the Obama era. AFTER the debt ceiling was lifted, the stock market went down by 15% and 10-year treasury yield dropped by 1%. iShares 20 Plus Year Treasury Bond ETF (TLT US) rose 33% in 2.5 months.
As bad as it was, the 2011 crisis provided investors with a reference. Investors can bet on rebounds if the market corrects. For bargain hunting, clients can use Nasdaq ETF QQQ and S&P ETF SPY. Singapore clients can use CFD for leverage. HK clients can use index futures.
Are the traders/issuers nervous? No.
We checked using structured product, we have not seen a significant increase in bids from banks. This means issuers are NOT paying up for downside puts.
Here are some details regarding the implications of the potential default.
- A Treasury Note missing a payment can be delivered into a futures contract, according to CME.
- Compensation for Delayed Payments: Congress need to explicit pass laws to provide compensation to holders of securities subject to a delayed payment on Treasury debt.
- There is no workaround. Biden invoking the 14th Amendment, the Treasury issuing a trillion dollar coin, the Fed swapping out securities under technical default for others, none of these are useful solutions.