The debt ceiling wrangling has damaged the credit reputation of the US, as the insurance costs for short-term bonds skyrockets.
Short-term costs for insurance against a US debt default are soaring right now, not that it seems to stop corporates from borrowing. According to Dealogic, US companies are rushing to borrow money in the bond market, bringing forward deals in case the country’s debt ceiling stand-off causes uncertainty for months to come. Companies have issued bonds worth US$112bn so far this month, up from US$46bn in May 2022 and more than triple the amount sold in April.
But while the market may look buoyant, and corporate America certainly looks relaxed in the face of the crisis, as pointed out by Timothy P. Speiss, Partner at Eisner Advisory Group, this directly increases the cost of borrowing for the government and thus the cost to taxpayers. “Since the middle of April 2023, yields on short-duration treasury bills around the expected deadline date have increased by nearly one percentage point, or roughly 20%,” he said. “Real-time data indicates markets are already pricing in political brinkmanship related to federal government default through higher risk premiums.”
The mood amongst corporates and right-wing thinkers is for the US government to rein in its spending, rather than to keep raising the debt ceiling.
“Corporate clients in the main favour balanced budgets,” said Speiss. “A larger US debt balance can place a high burden on corporations pertaining to the affordability and ability, to purchase and sell goods and services abroad and locally. Uncertainty experienced by corporate clients can result in many consequences, including reducing or relocating manufacturing production or/and workforces, within the US or abroad.”
Ironically, a debt breach would be beneficial to treasuries in the short term. When S&P downgraded the US in 2011, global assets were forced into US government bonds. Treasury bondholders would not risk losing their principal, they would simply see a delay in payments. As the debt ceiling deadline draws near, treasuries are maturing with higher yields than other bonds. But over the longer term, a technical default, even if brief, would likely undermine treasury demand, according to Bernstein Advisors. It predicts US interest rates will drift higher as global investors reassess the risk of dysfunction in the US political and economic system.
While analysts and investors are confident the US will avoid defaulting, political observers and economic experts alike are concerned at what the current negotiations are saying about US politics.
Don Kettl, former dean of the School of Public Policy has argued that the drama over the debt ceiling has accelerated in the last decade. He has accused both sides of using it as leverage to try to find ways of creating a crisis, to be able to bargain for a better position on the policies they want to try to either advance or stop. As negotiations become tenser between two increasingly polarised political parties, there is one thing everyone seems to be forgetting to do – budget. Maya MacGuineas, President of the bipartisan Committee for a Responsible Federal Budget has pointed out that neither Budget Committee has even bothered to put out a budget this year. She has called for reform of the debt ceiling as risk of default only makes the US economic situation more precarious, but stressed the need to replace it with something that would force lawmakers to adopt savings packages rather than the continued borrowing binge.