Investors have flocked to the US treasury as a safe place because of the market chaos triggered by President Donald Trump’s trade policy, but the towering debt ceiling debate and sustainable Brinkmanship Politics is a clear reminder that even the main risk-free assets in the world are not immune to cracking.
Treasury market US $ 28.5 trillion is the largest bond market in the world, known for its liquidity and stability, allows investors to quickly move a large amount of money. But there are a number of problems that can challenge views on the security of US debt securities.
The head between them is the debt ceiling, the loan limit that is forced himself requires the consent of the congress to be suspended or raised. Debt ceiling in 2023 encouraged the selling action of shares and bonds, pushing the US to the default threshold and injured its credit ranking.
Increasing the level of debt in recent years has damaged sovereign credit profiles, said Monica Defend, Head of the Amundi Investment Institute.
“But a greater threat is the possibility of a technical default because of the political argument of the debt ceilings,” Defend said. In 2023, the Congress lifted the debt ceiling until January 1, 2025, which means that parliament members had to review this problem later this year to prevent default. Some analysts estimate the X, when the government runs out of funds to meet all its debt obligations, it can be around July or August.
Meanwhile, the threat of the closure of the government, avoided in the last minute last week, was a reminder for investors from the ongoing Congress independence that had contributed to the steps of global ranking agents to reduce the ranking of the United States-level credit ranking.
Apart from the control of the Republican Congress, political polarization remains a major concern, because policy reforms often need bipartisan consensus, said a source at a large ranking agent, talking on anonymity conditions.
Harrison Fields, a White House spokesman, said Trump was committed to restoring fiscal credibility.
Long-term US interest rates recently since he returned to the White House on January 20 was a sign of market confidence in its policy, said Fields, referring to the decline in the term premium, which measured what investors were wearing to hold debts for a longer period of time, as further evidence.
Institutional power
The new Treasury gathered because the unexpected Trump tariff made a concern about the concern of trade war and recession potential, encouraging investors into the perception of US government debt security. At the same time, Sovereign Credit Default Swaps (CDS) – The main measure of credit risk – has risen to the highest since the beginning of November, when the cost of insuing the default rises in the middle of the selection and nervousness of the ceiling of the debt.
“The spread of the USA CDS tends to trade at a very strict level except during the period of concern of the debt ceiling. And to this day, the debt ceiling has not been raised,” said Jigar Patel, a strategist at Barclays.
Outside of political disputes, future ranking actions will depend on clarity around the US fiscal path, said the source at the ranking agency. Republicans encourage an extension of $ 4.5 trillion tax deduction, but the impact on the remaining deficit is uncertain without cutting large -magnitude expenses, which can clash with Trump’s promise to protect social programs.
In addition, institutional strength and government inspection and balance are under supervision, the source said. One field of focus is how the newly established government efficiency department (DOGE), led by Elon Musk to reduce wasteful expenses, can influence policy decisions and change the balance of power within the government, the source added.
Moody’s, the last main agent to consider US sovereign debt in the top triple-a ranking, cutting its prospects to be “negative” in November 2023. Fitch dropped the US credit ranking earlier that year, following the debt ceiling standoff, while the Global S&P ranking had warned that increased deficits and political gridlock could reduce the AA+ranking.
CREDIBILITY
Another potential risk to the bond market is the willingness of Trump’s administration to explore an unconventional strategy for managing US debt, analysts and investors said.
One idea to get an attraction among market participants is that Trump can take advantage of the threat of tariffs and US security alliances to persuade foreign governments to exchange their treasury ownership with lower century bonds.
“How it works is unclear, but I cannot imagine it will be good for the trust of US bond holders,” said Steven Zeng, a US -level strategist at Deutsche Bank.
Trump sometimes criticizes the federal reserve and pressing it to reduce interest rates. In recent weeks, Secretary Trump and Treasury Scott Bestsent have promised to contain 10 -year treasury results, building blocks for financial systems and benchmarks for consumer loan costs.
“If you are really worried about maintaining a low 10 years, you can double credibility,” said Ben Harris, Vice President and Director of Economic Studies in Brookings, who recently served as head of economists at the Ministry of Finance.
This can be achieved by promising to maintain the federal reserve independence, or through a timely and responsible budgeting process, he said.
“There is an inconsistency between the aspirations stated and their policy approach,” Harris said.
Source: Reuters
