U.S. government market sees a "decade of payback" period
In a yahoo finance interview, Brookings economist Ben Harris, former assistant secretary of the treasury under president Biden, shed light on the current financial landscape and future prospects with a hint of uncertainty. "I don't know if it's coming tomorrow or in a decade, but it's the day of reckoning," Harris stated, referring to the upcoming debt showdown.
"I don't know if it'll happen slowly or quickly," he added. "When Moody's lowers your credit rating, even if it's expected, it means a crisis has occurred."
Harris pointed out that the danger of default was previously unforeseen and that investors had not considered the cost of its potential likelihood. While the U.S. Treasury faced inflation, currency issues, and other risks, investors always assumed they'd get their money back.
"We're moving from a 100% certainty that they'll get all their money back to a 99.8% certainty," Harris emphasized. "This can be considered a significant change. They are no longer an absolutely risk-free asset. For default, they have transformed into a risky asset. So, our overall fiscal outlook now looks significantly worse."
If the yield on 10-year Treasury bonds reaches 5%, 6%, or even higher, investors would logically prefer Treasuries over other financial assets like stocks or corporate investments.
"The real threat is that this could lead to some sort of fiscal crisis," Harris pondered. "It could happen if we push the debt limit to such an extent that there's a chance of default on Treasuries. This could also occur if investors lose faith in the Fed Reserve's independence. A condition for this could be the refusal of foreign central banks to purchase Treasuries."
The ripple effects would impact credit cards and mortgage rates, as these typically follow Treasury yields. However, Harris stressed that a default would only occur due to political mistakes.
"We're the wealthiest country on the planet," Harris declared. "There are many assets available to pay coupons and repay a significant portion of American debt. Politicians will have to make a calculated decision to declare default on our debt. I can't imagine anything worse than that."
Moody's, one of the three major credit rating agencies globally, downgraded the U.S.'s top credit rating from Aaa to Aa1 on May 16. A week later, on May 22, the House of Representatives approved the White House administration's bill, which President Trump calls the "great and wonderful tax law" and which would cut taxes by $4 trillion and increase the national debt limit.
The rise in 10-year Treasury bond yields continues amid concerns that the national debt in the U.S. may lose control.
"Due to the rising concerns about the national debt, investors might prefer Treasuries over other assets such as stocks or corporate investments, as indicated by Harris," the economist stated.
"In light of the current financial landscape and the potential dangers, Harris emphasized that a default could lead to a fiscal crisis, affecting credit cards and mortgage rates, among other aspects," he added.
