- The odds of default in the US have more than tripled since the beginning of the year, according to MSCI.
- Trading activity in US government credit default swaps has surged as investors buy insurance against potentially catastrophic events, according to MSCI.
- A divided Congress has just a few months to pass an appropriation bill to avoid a default.
The odds of a catastrophic U.S. debt default have more than tripled since the beginning of the year. recent notes From MSCI.
of US debt ceiling reached in mid-January Since then, the U.S. Treasury Department has taken extraordinary steps to avoid a default and keep the government funded until some point in June.
Now, with the clock ticking for a split Congress to reach a deal and pass a spending bill to avoid a default on Treasury bills, some investors are considering a credit default swap on the one-year U.S. government bond. based on their trading activity.
A credit default swap is a form of insurance against an issuer’s failure to make scheduled obligation payments.
This trading instrument was successfully used by some investors (including Scion Capital’s Michael Burry) who bet on the housing market in 2008. Non-payment of the debt will trigger the protection payment of the CDS.
The MSCI stressed that the probability of default surged from 3.3% in early January to 11.3% last week, stating that “an implicit probability of default has not been seen since the 2013 debt ceiling debate. It has risen to the same level,” he said.
The surge in US Treasury CDS spreads has been rapid and large, but it is not unprecedented as CDS spreads are approaching similar levels. Between the 2011 and 2013 debt ceiling showdowns. During these battles, Congress reached a last-minute agreement to avoid a default.
“Without a legislative deal, the US government’s CDS trading volume could continue to grow as the summer approaches, increasing the likelihood that US Treasuries will go unpaid,” MSCI said.
An unprecedented event in which the United States defaulted on its debt, The consequences go far beyond treasury holders not receiving payments.
Because much of the global interest rate level is driven in part by the “riskless” nature of U.S. government debt, such a default could bring the economy to a halt and cause extreme fluctuations in interest rates. Additionally, millions of older people are at risk of losing their social security benefits.
MSCI said that in the event of a U.S. debt default, “both market turmoil and a sharp slowdown in economic activity are likely real.”