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Posts Tagged ‘debt ceiling’

The Debt Ceiling Is a National Security Threat

October 16th, 2013

by and

The debt ceiling is a threat to America’s national security.

If the debt ceiling isn’t increased, national security focused departments and agencies – and all of their employees – may not receive the money they need to keep defending the nation. This historic and potentially catastrophic default on U.S. national security will undermine the U.S. military, all national security-related federal workers and national security contractors.

Absent a political breakthrough in this needless standoff over the debt limit, before the end of the month the Treasury will enter a cash flow crisis, where we won’t have enough money to pay all of our bills.

Some Republicans claim the Treasury could prioritize payments, which could keep national security funds flowing. But doing so may be illegal and logistically impossible.

Treasury has indicated that the “least harmful option” in this disastrous scenario would be a so-called “delayed payment regime.” As the Treasury further noted, “no payments would be made until they could all be made on a day-by-day basis.” This would mean all payments to the military, national security agencies and national security contractors will be delayed until the Treasury had enough cash on hand to pay an entire day’s obligations, allowing the backlog of payments to grow in the interim.

American policymakers are all too aware of the consequences to our national security if the bills aren’t paid on time. “If we don’t increase the debt ceiling, the impact on our military will be unprecedented,” Rep. Madeleine Bordallo, the ranking Democrat on the House Armed Service Subcommittee on Personnel, explained at a hearing on October 10.

And events are going to get even worse.

Read the rest of this entry »

Have the Dominoes of Default Started to Tumble in the Markets?

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.

No Wall Street Panic Over the Shutdown… Yet.

October 1st, 2013

by and

The government is shut down and a potential debt ceiling standoff is not that far off. The question is, “What effect is this having on markets?”

The answer: the markets are fine… for now.

Below are two indicators that give real-time feedback about market reaction to the mess in Washington.

1. The VIX: Wall Street calls it the “fear gauge,” the VIX uses S&P 500 options to estimate future short-term market volatility. This morning (Tuesday, October 1), the VIX was a serene 15.90. The higher the VIX, the more uncertain investors are about the direction of the economy. In 2008 at the height of the financial crisis, the VIX reached 89.53. During the debt ceiling debate last time in August 2011 the VIX reached 43.05. No panic yet from Wall Street.

Here’s a link to the VIX:

2. Corporate Credit Spreads: Credit spreads measure the difference in yields between corporate bonds and government bonds. When credit spreads are small, it signals investor confidence in the economy. Widening credit spreads show deteriorating conditions in credit markets and investor nervousness about the overall business environment.  

The Corporate Master Index shows the credit spreads for all the bonds of investment grade companies like Home Depot. At the height of the financial crisis in 2008, the index spread were of 6.5%. During the debt ceiling debate in August 2011, the spreads were 2.7%. This morning, spreads were at 1.6%.

Here is a link to the Bank of America/Merrill Lynch Corporate Master (Investment Grade Bonds):

The High Yield II Index shows the credit spreads for all high yield bonds, also known as “Junk Bonds” from companies who during good times have to pay more to borrow. (This doesn’t mean high yield bonds are a bad investment, just that they offer higher returns for the increased risk of default they pose.) At the height of the financial crisis in 2008, the index shows these companies had spreads of 22.4%. During the debt ceiling debate in August 2011, the spreads were 9.1%. This morning, spreads were at 4.8%.

Here is a link to the Bank of America/Merrill Lynch High Yield II (Junk Bonds):

Tracking these indicators can help make sense of the market’s reaction to what’s happening inside the Beltway.

For more details on these indicators, read our recent papers, “The VIX: Measuring Uncertainty in Financial Markets” and “Covering the Spread: Credit Spreads as Leading Indicators.”


Post fiscal cliff: The fix is in

January 2nd, 2013


We’ve been trying to deal with the national debt in this country for 30 years now. The fiscal cliff is just the latest failed gimmick. We’ve had more failed gimmicks than professional wrestling.

Failed? Yes, because the whole idea of the fiscal cliff was to force the federal government to put in place a long-term reduction of the national debt. And look what happened. Instead of reducing the national debt, the deal passed by Congress late Tuesday night will add $4 trillion to the deficit over the next 10 years, according to the nonpartisan Congressional Budget Office.

Read the rest of this entry »

AAA Credit but Junk Bond Politics

August 2nd, 2011


This piece was originally published in Politico.

What if there’s another recession? That’s still a threat, even if the debt deal passes. If the recession starts while Barack Obama is president, it would normally be called “the Obama recession.”

But maybe not this time. Because after the debt deal, The Republicans in Congress own this economy just as much as Obama does. They’re the ones who drove the deal — and if the economy goes into recession, they’ll bear a lot of the responsibility.

The deal initiates a new regime in American politics: The Scarlet A. We’re in for an era of Austerity. The huge spending cuts — half now, half five months from now — threaten to turn a fragile recovery into a double-dip recession. Read the rest of this entry »

The Perils of a Balanced Budget Amendment

July 19th, 2011


This piece was originally posted on The Huffington Post.

It’s baaaack! This week, Congress will vote, yet again, on a balanced budget amendment to the Constitution.

A two-thirds majority in each house of Congress is required to amend the Constitution. Since 1980, Congress has voted on a balanced budget amendment five times. The closest it has come to passage was in 1995, when it passed the House of Representatives but failed to pass the Senate by one vote.

The American public has long supported a balanced budget amendment. Why? It’s common sense. If you keep on spending more money than you take in, you’re headed for trouble. Every state except Vermont has some sort of requirement that its budget be balanced.

Conservatives see a balanced budget amendment as a way to institutionalize their agenda. Once the amendment is in place, it will become extremely difficult — literally unconstitutional — for the federal government to increase spending beyond revenues. Read the rest of this entry »