US Treasuries have long been considered a safe haven for investors—a go-to refuge in turbulent times and the bedrock of global financial markets. That’s because Treasuries are highly liquid and are backed by the full faith and credit of the US government, which has never defaulted in all its 247 years.
Nonetheless, investors tend to get jittery when the US Treasury borrows more than Congress has authorized. That happened in mid-January when the federal government breached the statutory debt ceiling, which currently stands at $31.4 trillion. While the government has not technically defaulted, the risk of default—even if unintentional—has escalated significantly.
Fortunately, the Treasury Department has taken “extraordinary measures”—primarily in the form of accounting sleight-of-hand—to keep the federal government solvent, and we believe that there is little risk of an actual default before September.
But kicking the can down the road doesn’t rule out potential minefields for investors in the meantime—particularly in the short-term markets.
X Marks the Spot
The primary issue at hand is the “X-date”—essentially, the point of no return. If Congress fails to raise or extend the debt ceiling before the X-date, the US Treasury would lack authorization to issue more debt and could technically default on its existing obligations.
It’s a worst-case scenario, and one we don’t believe will come to pass. But it’s still enough of a threat to make Treasuries maturing on or around the estimated X-date inherently riskier. This, in turn, has the potential to ratchet up market volatility in short-term markets—particularly as we get closer to the as-yet-unknown X-date without a resolution on raising the debt ceiling.
Notably, a US government “default” is not a typical variety of default. In this case, interest and principal on “defaulted” maturities would get delayed or extended and paid once the debt ceiling is resolved. Investors not concerned with delayed payments would then jump in and buy these maturities to take advantage of any spread widening (typically 30–50 basis points) and help stabilize the market (Display).