The threat of a U.S. debt default continues to percolate. And while markets remain complacent broadly, there is some fraying at the edges. Treasury bills maturing in the first week of June are trading at close to a 7% yield. The cost of buying one-year default protection on U.S. government debt, through the credit default swaps market, is much greater than what it was in 2009, amid the Great Financial Crisis. Or during 2011, when S&P Global Ratings downgraded the U.S. because of similar debt ceiling negotiations.
Now another credit agency, Fitch Ratings, just placed the U.S. on negative outlook. That’s a stern way of telling a borrower they need to restore discipline. Otherwise, a credit downgrade will likely follow. In its statement, Fitch amplified that political deadlock was one of the reasons for its move.
In the 1960s, France’s finance minister at the time complained about “America’s exorbitant privilege,” given the dominance of U.S. dollars in international trade and, by extension, the demand for its debt. If steps are not taken in the near term by U.S. political leaders, this historically favourable positioning could be at risk, and more action from ratings agencies and growing hot spots of market deterioration may be needed to force a settlement. Hopefully, it won't come to that.
Source: Bloomberg, 2023.