With the U.S. Senate's final passage of the debt ceiling bill, the drama of this round of the U.S. debt ceiling crisis has finally come to an end.
But this is not the end, but rather a sign that the U.S. economic crisis will continue in a different form.
Because the most important factor causing the U.S. to continuously sell off is the continued interest rate hikes by the Federal Reserve.
Looking at the performance of U.S. Treasury prices, countries have readjusted their attitudes towards U.S. debt and are selling off in large amounts again.
01, Interest rate hikes are still to come
The passage of this ceiling plan is the 103rd adjustment of the debt ceiling in the past, isn't that exaggerated, almost twice a year.
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Now more and more people are realizing that Congress setting a debt ceiling for the Treasury is not really to constrain the U.S. from issuing debt, this is just a seemingly plausible reason for one political negotiation after another between the two parties.
How is the economic performance? It is never within their consideration.
In mid-to-late May, when all parties in the United States were negotiating intensively to resolve the U.S. debt crisis, the Federal Reserve finally gave everyone a breather, hinting on several occasions that interest rate hikes would be paused in June.
Now it seems that the possibility of interest rate hikes in June has indeed been greatly reduced.However, with the debt ceiling bill just passed, the possibility of the Federal Reserve raising interest rates in July has significantly increased.
But the crisis for banks has consequently intensified. A report previously released by the Federal Reserve showed that among the current American commercial banks, at least 700 banks have balance sheets indicating unrealized losses reaching 50%, with the fundamental reason being the continuous decline in the bond market.
Moreover, the Federal Reserve's interest rate hike could pose a significant challenge for the U.S. Treasury.
02, Debt Issuance is Still Necessary
The latest data from the U.S. Treasury indicates that the cash on hand is now only over 20 billion. Fortunately, the debt ceiling bill was timely approved by Congress, which means the Treasury needs to immediately issue the latest debt.
Previously, in response to the drying up of funds at the U.S. Treasury, the Treasury had to take extraordinary measures.
The U.S. Treasury has a plan to issue cash management bills worth 25 billion U.S. dollars. In fact, these cash management bills are only issued when there is a shortage of funds and are not regular bonds.
The special nature of this issuance lies in the term of the bills, which are usually issued for more than a week, but this time it is only for three days.
Therefore, this issuance of cash management bills is unprecedented.
And this planned issuance is on June 2nd, with bidders being able to recover principal and interest on the 5th.It is evident that the U.S. Treasury is in a state of severe financial strain.
However, following this, if the U.S. Treasury intends to issue conventional U.S. Treasury bonds, it faces two challenges.
The first challenge is that the Federal Reserve is expected to continue raising interest rates, which implies that the interest rates on U.S. Treasury bonds will also increase, leading to a growing burden of interest payments on the national debt for the U.S. Treasury in the future.
The second challenge is that in order to sell more U.S. Treasury bonds, the current issue of selling off must first be addressed.
03, Still Selling Off
We can observe from the yield curve of the 10-year U.S. Treasury bonds that the selling off has resumed.
It should be clarified that an increase in yield means a decrease in price, and it also indicates that there are more sellers than buyers.
From the changes in yield, we can see that the yield has significantly increased, corresponding to the time when there might be a default on U.S. Treasury bonds, and negotiations are still ongoing.
Then, in the past few days, the yield fell, the price of U.S. Treasury bonds rebounded, and selling off weakened, corresponding to the time when the U.S. Treasury debt ceiling plan was passed.
But this was merely a short-term price rebound; the news was quickly digested, and the market once again became aware of the risks associated with U.S. Treasury bonds. Therefore, we see that the yield on the 10-year U.S. Treasury bonds has risen again, the price has fallen again, and selling off has resumed.