Markets are growing nervous over the prospect of a US default as debt ceiling deadline looms

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  • Investors are getting nervous that the US could default on its debt.

  • Demand for debt insurance has skyrocketed, while demand for US Treasury bills has fallen off, the FT reported.

  • The US could fail to meet its obligations as soon as July this year, the Congressional Budget Office warned.

Investors appear to be growing more anxious about the standoff on raising the US debt ceiling as a deadline looms before the US possibly defaults this summer.

Five-year credit default swaps on US government debt – one of the most traded forms of debt insurance– have notched their highest price since 2012, the Financial Times reported, reflecting investors’ desire to protect themselves against a potential default of debt.

Meanwhile, the demand for US Treasury bills has fallen off, a sign investors are leaning away from government-issued debt as the impasse over raising the debt ceiling drags on. Prices for Treasury bills that expire in late summer – around the time a debt default could potentially happen – have fallen below those of other, riskier short-term debt instruments, the FT said.

Though experts say it is unlikely, a debt default would be potentially catastrophic for markets, with US Treasury Secretary Janet Yellen calling such an event an “unthinkable.” Markets could easily be upended by liquidity problems as bond holders, businesses, and foreign governments sell their holdings, which could spark a financial crisis, she warned.

But time is running out for policymakers, who are holding out as they spar over possible spending cuts as a condition for raising the debt ceiling. The X-date – when the US will fail to meet its debt obligations – could fall between July and September of 2023, according to a projection  from the Congressional Budget Office.

In the meantime, the US Treasury has stepped in with “extraordinary measures” to make sure the government can continue to meet its obligations, stalling an immediate crisis from hitting the economy.

House Republicans are reportedly starting to create a debt ceiling package and could be close striking a deal with Democrats, but the proposal includes hefty spending cuts, Punchbowl News reported, including banning items on Democrats’ agenda like student loan forgiveness.

Read the original article on Business Insider

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