Cost of insuring against US default contracts further on debt bill hopes
Reuters
Published May 30, 2023 03:54PM ET
Updated May 30, 2023 05:08PM ET
LONDON (Reuters) - The cost of insuring exposure to a U.S. debt default fell further on Tuesday, reflecting investor optimism over a tentative deal by U.S. lawmakers to raise the $31.4 trillion debt ceiling.
Trading picked up on Tuesday after much of Europe and the United States were closed on Monday for holidays.
In mid-morning trading, the U.S. one-year credit default swap (CDS)- a market-based gauge of the risk of default - narrowed to 53 basis points (bps) from 133 bps at Monday's close, data from S&P Global (NYSE:SPGI) Market Intelligence showed on Tuesday.
U.S. five-year CDS fell to 41 bps from 56 bps at Monday's close, the data showed.
A crucial first test comes on Tuesday, when the House Rules Committee takes up the debt ceiling bill, in a necessary first step before a vote in the full House.
Both Democratic President Joe Biden and the top Republican in the House, Speaker Kevin McCarthy, were confident that they will get enough votes to pass it into law before June 5, when the U.S. Treasury Department says it will not have enough money to cover its obligations.
Some investors though remained apprehensive about the debt limit agreement, as some of the proposed bill's provisions could undermine economic growth.
On the other hand, the U.S. Treasury's expected issuance binge to build up its cash buffer will likely reduce market liquidity sharply, which could push short-term interest rates higher.
"We suspect these fears are likely overdone," wrote Karl Schamotta, chief market strategist at Corpay in Toronto.
"Although there are some procedural landmines ahead that could impact the final wording, the impact on spending associated with the so-called 'Fiscal Responsibility Act' should be almost unnoticeable from a macroeconomic standpoint, leaving the government's biggest outlays essentially unchanged," Schamotta said.
With respect to the U.S. government's expected flood of supply after the debt ceiling bill is passed, Schamotta noted that Treasury officials "are well-practised in slow-walking issuance or otherwise minimizing disruption around funding surges."
Get The News You Want
Written By: Reuters
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.