The risk of a US default and the debate about raising the debt ceiling in return for spending cuts between Democrats and Republicans in Congress are greater than their predecessors, threatening to push global markets into more pain. For investors, there are few safe havens to hide in other than the oldest method of hedging: gold.
The precious metal is by far the best choice for those seeking to protect against the risk of expiration of the deadline for reaching the debt ceiling without reaching an agreement, according to the latest survey conducted by “Markets Live Pulse” from “Bloomberg”, and viewed by “Al Arabiya.net”. More than half of finance industry professionals said that gold is what they would buy if the US government failed to meet its obligations.
But most surprising was the lack of alternative hedges. The second most likely asset they intended to buy in the event of default, according to a global survey of 637 respondents, was US Treasury bonds. It is a highly controversial choice, given that this is the very thing America is likely to fall behind.
Keep in mind that even pessimistic analysts see holders of US Treasury bonds getting paid – albeit too late – and that in the more serious debt crisis cases of previous years, Treasurys rose even as the top US credit rating was removed by Standard. & Poor’s.
While traditional haven currencies such as the Japanese yen and the Swiss franc had some admirers, each was less popular than the US dollar or, perhaps most surprisingly, Bitcoin, which some investors saw as a kind of digital gold.
It comes as top political and financial figures lined up to offer warnings about what might happen if the debt ceiling impasse is not resolved. “The whole world is in trouble,” said President Joe Biden. As Jamie Dimon, head of “JP Morgan Chase & Co.,” expressed his opinion, saying: “It could be disastrous.” While the International Monetary Fund warned that a US debt default would have “very serious repercussions”.
A sovereign debt default by the world’s largest economy is probably out of the question. But it is certainly something to think about now.
About 60% of respondents to the MLIV Pulse survey said the stakes are greater this time than they were in 2011, and worse than any debt crisis in the past. The cost of insuring against default through one-year default swaps is higher than previously seen levels, although it still indicates that the actual chance of default is relatively small.
Jason Blum, head of fixed income, alternatives and ETF strategies at Invesco, sees the stakes as higher than ever, given the congressional and voter turnaround on both sides. “The way the polarization is going on on both sides means there is a risk that they will not work together at the right time,” he said.
Even the safe haven is a risk in itself, as it is currently trading near its record levels. Buoyed first by growing demand from Chinese luxury buyers, then by the crisis in the banking sector and the threat of default in the US.
A comfortable majority of investors in the MLIV survey believe that the 10-year Treasury note will rise if the debt ceiling battle ends. However, professionals are divided on what would happen if the US government did indeed falter. About 60% of retail investors expect 10-year Treasury bonds to decline in the event of a default. The yield on US benchmark notes ended last week at 3.46%, about 63 basis points below its high for the year.
Meanwhile, the debt-ceiling impasse has led to higher yields on some very short-term securities that are seen as most at risk of delinquency, creating distortions in the yield curve. The highest rates are those in early June, close to the point where Treasury Secretary Janet Yellen warned that the US might run out of borrowing. But if the administration can get past mid-June, it will likely get a little breathing room from expected tax payments and other measures, before facing new challenges from late July, when market pricing also signals a degree of nervousness.
Crisis 2011
In the 2011 crisis – which led to a downgrade by S&P but not an actual default – increased Treasury purchases sent the 10-year bond yield down to a then-record low, while gold soared and the global stock market suffered losses of Trillions of dollars in its market capitalization.
Some investors believe the debt ceiling drama has already caused some damage to the dollar, and 41% said its status as the primary global reserve currency is at risk if the US defaults.
Investors take the risk of a move away from the dollar seriously. A previous MLIV Pulse poll showed that a majority of respondents see the dollar as making up less than half of global reserves in a decade’s time.
