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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.

Faith in Math

February 21st, 2012


Nate Silver makes a meticulous mathematical argument that President Obama would be better off gaining downscale whites even if it costs him many upscale white voters (“Why Obama will embrace the 99%”). But for his math to add up, he has to make a giant leap of faith: that populism will win over working class whites. But where’s the compelling evidence for this populist proposition?

In our surveys of this same group of voters, there is certainly anger directed toward Wall Street, Congress, and special interests, yet we keep hearing a much more resonant emotion: anxiety.  These and other swing voters are deeply concerned that the country is in decline. They fear that they, and especially their children, may not be able to successfully swim against an ebbing tide of American greatness. They don’t know what America does or makes anymore that represents a solid chance for opportunity and growth for themselves and their communities.

Among arguably the most important swing block of the electorate – those who voted for Obama in 2008 but switched to the Republicans in 2010 – this anxiety about America is palpable. In our 2011 survey we asked them to imagine that the world economy were the Olympics, and only one-third said that America would earn the gold 10 years from now. An equal amount said we would not be on the medal stand at all. Michael Ford, who directs the Center for the Study of the American Dream at Xavier University, found that middle income Americans overwhelmingly believe “the future is being created elsewhere” and that the middle class has lost faith in every major institution in America except the military. A pessimistic populism focused mainly on fairness, income inequality, and anti-corporatism does not speak to, much less answer, these profound anxieties.

Whether he runs as a populist or centrist, President Obama may be reelected no matter the rhetorical framework. As Mr. Silver notes, the economy is improving, bin Laden is dead, and al Qaeda is in tatters. And let’s not discount the fractured primary on the Republican side. But ultimately, an anger-based “people versus the powerful” argument has been tried, time and again, in the modern political era – by Mondale, Gore, Kerry, and Edwards, among many others – and it always comes up short. What voters along the income spectrum want is a leader who eases their anxieties and speaks to their aspirations, not one who echoes their anger. If Nate Silver has persuasive evidence to the contrary, he didn’t include it in his mathematically astute piece.


Obama rallies his troops in SOTU

January 25th, 2012


This piece originally appeared in Politico.

A speech about fairness is bound to be divisive. Mitt Romney figured that out. In a “prebuttal” delivered hours before President Barack Obama’s  spoke on Tuesday night, Romney said, “It is shameful for a President to use the State of the Union to divide our nation.”

There was only one problem. He didn’t. The president did talk about fairness. He even demanded that millionaires pay higher taxes. But he found a way to do it that wasn’t divisive. He used the image of all Americans fighting together as a team.

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Occupy Wall Street Need Goals for Public Support

October 18th, 2011


This piece was originally published by Politico.

Austerity is so last year.

It was all the rage in 2010 with the rise of the tea party. This year, an inevitable backlash has set in. With the emergence of the Occupy Wall Street protests, we’re seeing a pivot in the opposite direction — toward fairness.

In 2010, the debt crisis terrified governments all over the world. If we don’t start living within our means, government leaders warned, we could all turn into Greece.

In the United States, the tea party movement forced austerity onto the national agenda. Cut government spending! Balance the budget! Or else the tea party will get you. Which is exactly what it did in the 2010 midterm.

The threat of tea party opposition scared the bejesus out of congressional Republicans. In the House of Representatives, the tea party elected a huge class of freshman legislators, who became the Austerity Army. No stimulus spending! No unemployment compensation! No disaster relief unless it’s paid for!

But guess what? Pain is not popular. This year, the economy has taken a turn for the worse. The threat of a double-dip recession is real. And we’re seeing the first stirrings of protest on the left. Read the rest of this entry »

Great Disconnect, Act Two

April 25th, 2011


What just happened? The mood of the country has suddenly taken a nosedive in the past month.

In the April CBS News-New York Times poll, 70 percent of Americans say the country is off on the wrong track. That’s the highest figure since President Obama took office. The number who say the economy is getting worse jumped from 26 percent in March to 39 percent in April – the highest level of pessimism in two years.

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Bracing for Victory

December 20th, 2009


Originally published in Politico

Advice to Democrats: brace yourselves for victory. Because if Congress passes health care reform, Democrats better be prepared to defend it.

“Our Democratic friends are about to walk off a political cliff here,” Sen. Lindsey Graham (R-S.C.) warned during the Senate debate this week. “Do we really want to change one sixth of the economy without a single Republican vote?”

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