Third Way Perspectives
Archive for the ‘Economic Program’ Category
October 21st, 2013
Perhaps we underestimate ourselves. Five years after the Lehman collapse triggered the deepest recession in eight decades, the middle class may be solving the vexing problems of income inequality and stalled wages on its own.
Faced with unemployment and dim job prospects, Americans made one significant change that should alter their fortunes and those of the middle class for decades: they went back to school. During the recession, there has been a sharp surge in the number of Americans who are getting a college degree. Read the rest of this entry »
October 3rd, 2013
How are markets reacting to the threat of default?
Treasury Secretary Lew has stated that the U.S. government will run out of cash on October 17th. In the market, the dominoes are already starting to tip and a “Congressional Default Risk Premium” has started. This means that investors are demanding greater compensation to hold U.S. government debt that matures after October 17th.
How do you spot the default risk premium?
On Tuesday, government bond trader Ed Bradford (@fullcarry) tweeted that the yields of U.S. T-bills maturing around the October 17th drop-dead-default-date were “blowing out,” that is market-speak for rising sharply. T-bills are Treasury bonds with short maturities, no more than 1 year.
A chart prepared by Bank of America Merrill Lynch analysts shows very-short-term Treasury bills are trading at sharply higher yields—an indication of real default fear in the market.
BofA Global Research, Bloomberg, Business Insider
What is happening today?
Today, yields are even higher. Compare today’s .04% yield on the T-bill maturing on 10/10/13 with the yields on the T-Bills maturing 10/17/13, 10/24/13, 10/31/13—during the default risk zone. Yields on the debt maturing during the assumed default period are sharply higher—at least double the yield of the debt maturing on 10/10/13. And rising bond yields signal increased risk.
- T-bill maturing 10/17/13 is yielding .10%
- T-bill maturing 10/24/13 is yielding .12%
- T-bill maturing 10/31/13 is yielding .135%
Who owns T-bills? How will they be harmed if the U.S. defaults?
Businesses use T-bills to manage their cash. Normally, businesses don’t sit on excess cash. If payroll is due in a month, a corporate treasurer may invest cash in a T-bill that matures in month. When the T-bill matures the company gets cash to meet its payroll obligations (plus a little interest).
But, what if when the T-bill matures the payment is delayed because the statutory debt limit has not been raised? Then you have problems because the business may be unable to meet their obligations—like paying employees and suppliers. This increased risk is displayed by today’s oddly shaped yield curve.
What’s a yield curve?
The Treasury yield curve plots interest rates for bonds against different time horizons—from very short-term to 30 years. Normally, investors will accept lower yields on short-term debt. But to hold debt maturing in the default-risk-period the market is demanding greater compensation—the congressional default premium.
This is evident if you compare the very short-term section of Tuesday’s yield curve with the yield curve that existed just a month ago. The first dominoes are starting to tip.
Business Insider/Matthew Boesler, data from Bloomberg
The bottom line is this: investors are preparing for the unthinkable—a U.S. debt default.