Everyone was very afraid that the US would default, but it seems to have been cleared: Congress approved the increase of the national debt limit. But that doesn't mean that all is well ahead. As soon as the US starts printing new Treasuries, their stock market might crash. After all, the big problems of the US economy are not going anywhere.
The budget deficit will remain large
There are no options: The Treasury needs to borrow urgently to fill the hole. For several months, the government has been literally scraping at the coffers to avoid a default. Now, over the next three months, the Finance Ministry will have to borrow $730 bln, according to Morgan Stanley. The deficit is not going to disappear: the Democrats did not cut so much spending, and now the elections are approaching: no time to save.
As a result, not only will the national debt grow, but (even worse) the cost of its service. In a few more years, the US budget will spend more on bond coupons than on military spending.
All the factors are in place to keep those interest rates even higher:
- High inflation is keeping the key rate down.
- The default issue has not disappeared, but is "hanging in the air," and the profitability will have to tempt investors to take the risk.
Investors will flee into treasuries
Why risky assets when there is a safe haven of treasuries? As long as rates are high, US government bonds have attractive yields. So a new issue could be bought back quickly - and liquidity would plummet from the market.
Investors are really worried: bets on the decline of the major ETFs in the US have reached a record high, notes Goldman Sachs.