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Is the US Government Quickly Approaching a Default on its Debt?

Miguel A. Rodriguez
Miguel A. Rodriguez
23 May 2023

The June 1 deadline for the US to reach a deal on its debt ceiling is fast approaching. Although talks are still in the works and the possibility of a default could cause chaos in the markets, investors seem to be confident that a deal could be reached in time. 

Since last week, discussions to negotiate a debt ceiling agreement in the US have been ongoing. To find a way forward, Republican Congressman McCarthy and President Biden met once more to continue discussions. 

However, the time for Congress to increase or suspend the ceiling is quickly approaching, and according to some projections, the government would be left with no choice but to default on its debt after June 1. The economy would suffer significantly if there were no agreement, according to Treasury Secretary Yellen. 

Economists and government officials have said that a default may cause a great deal of turmoil in the financial markets

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Market volatility brought on by a default would likely result in a sell-off of bonds, erratic stock markets, and forced closing of positions in other assets when positions are held using government debt as collateral. 

Even so, the market seems to bank on a deal to lift the debt ceiling, avoiding an unprecedented situation with unanticipated implications. The Nasdaq Tech Indices have reached new highs because of US tech companies' better-than-expected earnings, and US stock indices are remaining stable amid a low volatility environment. 

As the Federal Reserve (Fed) gets ready for its next meeting to decide on interest rates, uncertainty still looms over the financial markets. 

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The possibility that the Fed would maintain rates in June is priced in at 75% on the futures market. This possible pause will allow monetary policymakers to evaluate the success of their recent initiatives. A second justification for not raising interest rates is to prevent more instability in the US banking system, like the one seen by regional banks in recent weeks. 

The Fed’s preferred inflation rate for assessing the evolution of prices will be made clear this week along with other pertinent economic data that will affect the central bank’s decision. 

graphic DMO 23.05.2023.png

Sources: Bloomberg, Reuters 

 

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Miguel A. Rodriguez
Miguel A. Rodriguez
Financial Writer

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.