All Eyes on Washington as Debt Limit Crisis Sharpens

Things appear to be coming down to the wire in the latest debt ceiling negotiations, as the US government may be within weeks of running out of options for avoiding default. Now both sides are hunkering down for negotiations to extend the debt ceiling, as even an accidental default could have catastrophic consequences and erode trust in the US dollar and US Treasury securities.

The impasse right now is due to the fact that President Biden wants a “clean” debt ceiling increase with a straight increase in the ceiling and no conditions. Republicans, meanwhile, want to tie a debt ceiling increase to spending cuts. And the two sides thus far have yet to come to an agreement, leaving markets in suspense.

The Impact on Bond Markets

If you follow the Treasury’s daily yield curve data, you’ll have seen some crazy bond yield movements in recent weeks. First, the yield on 4-week Treasuries began to be pushed down in mid-April as buyers started to flock to short-dated Treasuries ahead of a potential default. The increased purchases suppressed yields, with the 4-week Treasuries falling as low as 3.40% at one point, with a 164-point spread between the 8-week Treasuries which were yielding 5.04%.

Now things have flipped around, with the 4-week Treasury issues seeing interest rates as high as 5.81% last week, versus 4.82% for the 8-week Treasury, a spread of 99 basis points and a 263-point swing in spread. Those kinds of movements aren’t normal in bond markets, and they indicate how bond traders are trying to react to the possibility of a US government default.

If bond markets are behaving this erratically now, just imagine how things might go if the US does default. Any default would likely only be short-term, on a relatively small amount of bonds, and a solution would likely be rapidly achieved, certainly within days but possibly even within hours. Yet the damage that would do to the credibility of the US government and the perceived safety of US Treasury bonds could be incalculable.

Interest rates could rise significantly as traders would no longer trust the government to keep its word. And every time the government gets near the debt ceiling in the future, Treasury yields could become just as unpredictable as they are right now.

Will Republicans Succeed?

Republicans want to score political points here by getting spending cuts in exchange for raising the debt ceiling. But let’s be honest – Congress isn’t going to quit spending like a drunken sailor. Spending cuts aren’t normally cuts to current spending, they’re cuts to future spending.

When you hear things like “We want to cut $1 trillion in spending,” what that normally means is that they’re looking for a total of $1 trillion in spending cuts over the next 10 years, or in other words, $100 billion in spending cuts each year.

Many times these aren’t even promises to cut spending, they’re just promises to cut the anticipated future growth of spending. So in reality the government is still spending more money each year, but its rate of spending growth is decreasing. That’s what passes as a “spending cut” in Washington these days.

In other words, if you think Republicans will get some sort of great deal out of this and finally manage to slash the federal budget, you’re sadly mistaken. They may be able to make some political hay out of this and make some gains around the margins, but for the most part don’t expect anything earth-shattering of the final deal.

Where the real negotiation comes in is in just how much to increase the debt ceiling. Raising it to something like $33 trillion would ensure that we’re just going to have to go through this whole process again in a couple of years. Pushing it to $35 trillion would push it into the next President’s term. And $40 trillion could give a lot of breathing room.

Since there’s always something to be gained in the political bargaining surrounding a debt limit increase, the incentive is to make an increase short-term rather than long-term. But the more often these types of crises occur, the more fearful markets become about the long-term stability of US Treasury bonds, and the more damaging it could be to the long-term strength and status of the US dollar.

The Debt Ceiling and You

In all likelihood this debt ceiling impasse isn’t going to have a direct effect on you or your finances, unless perhaps you own large amounts of Treasury bonds, in which case you might be sweating bullets. But the longer-term impacts of this crisis could prove to have negative financial consequences for many American investors if the view of Treasury bonds as a safe haven asset deteriorates as trust in the government’s ability to pay erodes.

How many people abide by the standard advice to hold more bonds than stocks as they near retirement? And how many people buy Treasury bonds because of their high bond rating and perception as being a near risk-free asset?

A debt ceiling default could destroy Treasury bonds’ reputation as a safe haven and could upend world bond markets. And that could wreak havoc on many Americans’ plans for retirement.

In response to the uncertainty surrounding the debt ceiling, many people are making moves to add certainty and stability to their portfolios, and they’re doing that by buying gold. Gold has a reputation for being a safe haven asset too, a reputation that has been earned over hundreds of years. It has helped protect people’s wealth against inflation, currency devaluation, and financial crisis, and continues to be one of the most popular safe haven assets around.

Perhaps most importantly, gold is a physical asset that can’t be created out of nothing, unlike the US dollar. No matter how much money the US government has created and spent over the years, gold has continued to maintain its value and purchasing power.

If you’re worried about the impact rising federal debt and a possible debt default could have on your finances, maybe it’s time to start looking at gold. The experts at Goldco have helped thousands of satisfied customers buy gold over the years, and they’re ready to help you too. Call Goldco today to learn more about how gold can help safeguard your hard-earned savings.