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The possibility of the United States defaulting on its debt is a daunting prospect for many investors. The US government could run out of funds to pay its bills as early as June 1st if the debt ceiling is not raised by Congress, according to Treasury Secretary Janet Yellen. Republicans and Democrats have been debating how to raise the debt ceiling for months, but they have so far made little progress toward reaching an agreement.
President Biden has invited top lawmakers from both parties to discuss the matter next week. This estimate is shorter than previously anticipated, which puts the US at risk of defaulting on its debt for the first time. Republicans want spending cuts in exchange for raising the borrowing limit, while Democrats want to raise it without any conditions. The impasse has caused concern in the bond market and may have dangerous financial and economic consequences, including a potential global crisis.
It's uncertain what would occur if the country were to default on its debt since it has never transpired previously. However, a near miss in 2011 created turmoil in the financial markets, resulting in Standard & Poor's lowering the US' credit rating from AAA to AA+. Notably, the United States has accumulated a significant amount of debt, with the total amounting to $31 trillion, equivalent to $94,000 per U.S. taxpayer.
Suze Orman, a financial expert, believes that a U.S. default would be catastrophic, with far-reaching consequences for foreign governments and insurers who hold U.S. Treasuries, as quoted on fool.com. However, Orman and former FDIC chair Sheila Blair believe that the chances of this happening are slim, per the article. While no investment is 100% safe, history suggests that U.S. Treasuries are one of the safest places to invest your money.
Time for U.S. Treasury ETFs Despite Default Talks?
The long-term U.S. treasury ETF iShares 20+ Year Treasury Bond ETF (TLT - Free Report) has added 1.57 billion while has hauled in about 372.6 million in assets past week. This shows investors’ faith in the U.S. treasuries. U.S. treasuries are considered to be one of the safest assets in the world.
The increasing recession concerns have led investors toward this apparently-safe asset class. According to a survey conducted by the International Association of Credit Portfolio Managers, a majority of respondents (about 84%), believe that there is a possibility of a U.S. recession in 2023. Plus, credit portfolio managers are predicting an increase in corporate defaults in the upcoming year., as quoted on Bloomberg.
The U.S. treasuries are currently high-yielding too. With the Fed likely to turn less-hawkish this year, investors’ preference toward U.S. treasuries should strengthen. Notably, a hawkish Fed means a rise in bond yields and bond yields are inversely related to the bond prices.
If this was not enough, the ongoing regional banking crisis has boosted the demand for safe assets even more. Since early March, Silicon Valley Bank, Signature Bank and First Republic Bank have failed in the United States. There are fresh indications of a crisis at PacWest Bancorp and Western Alliance Bancorp. Significant part of America's banks are at risk of insolvency, per some market watchers.
ETFs in Focus
Against this backdrop, investors can play U.S. treasury ETFs with a medium-term view.
Image: Bigstock
Time for U.S.Treasury ETFs?
The possibility of the United States defaulting on its debt is a daunting prospect for many investors. The US government could run out of funds to pay its bills as early as June 1st if the debt ceiling is not raised by Congress, according to Treasury Secretary Janet Yellen. Republicans and Democrats have been debating how to raise the debt ceiling for months, but they have so far made little progress toward reaching an agreement.
President Biden has invited top lawmakers from both parties to discuss the matter next week. This estimate is shorter than previously anticipated, which puts the US at risk of defaulting on its debt for the first time. Republicans want spending cuts in exchange for raising the borrowing limit, while Democrats want to raise it without any conditions. The impasse has caused concern in the bond market and may have dangerous financial and economic consequences, including a potential global crisis.
It's uncertain what would occur if the country were to default on its debt since it has never transpired previously. However, a near miss in 2011 created turmoil in the financial markets, resulting in Standard & Poor's lowering the US' credit rating from AAA to AA+. Notably, the United States has accumulated a significant amount of debt, with the total amounting to $31 trillion, equivalent to $94,000 per U.S. taxpayer.
Suze Orman, a financial expert, believes that a U.S. default would be catastrophic, with far-reaching consequences for foreign governments and insurers who hold U.S. Treasuries, as quoted on fool.com. However, Orman and former FDIC chair Sheila Blair believe that the chances of this happening are slim, per the article. While no investment is 100% safe, history suggests that U.S. Treasuries are one of the safest places to invest your money.
Time for U.S. Treasury ETFs Despite Default Talks?
The long-term U.S. treasury ETF iShares 20+ Year Treasury Bond ETF (TLT - Free Report) has added 1.57 billion while has hauled in about 372.6 million in assets past week. This shows investors’ faith in the U.S. treasuries. U.S. treasuries are considered to be one of the safest assets in the world.
The increasing recession concerns have led investors toward this apparently-safe asset class. According to a survey conducted by the International Association of Credit Portfolio Managers, a majority of respondents (about 84%), believe that there is a possibility of a U.S. recession in 2023. Plus, credit portfolio managers are predicting an increase in corporate defaults in the upcoming year., as quoted on Bloomberg.
The U.S. treasuries are currently high-yielding too. With the Fed likely to turn less-hawkish this year, investors’ preference toward U.S. treasuries should strengthen. Notably, a hawkish Fed means a rise in bond yields and bond yields are inversely related to the bond prices.
If this was not enough, the ongoing regional banking crisis has boosted the demand for safe assets even more. Since early March, Silicon Valley Bank, Signature Bank and First Republic Bank have failed in the United States. There are fresh indications of a crisis at PacWest Bancorp and Western Alliance Bancorp. Significant part of America's banks are at risk of insolvency, per some market watchers.
ETFs in Focus
Against this backdrop, investors can play U.S. treasury ETFs with a medium-term view.
iShares 1-3 Year Treasury Bond ETF (SHY - Free Report)
Vanguard Short-Term Treasury ETF (VGSH - Free Report)
iShares iBonds Dec 2025 Term Treasury ETF (IBTF - Free Report)
BondBloxx Bloomberg Three Year Target Duration US Treasury ETF (XTRE - Free Report)
iShares 0-3 Month Treasury Bond ETF (SGOV - Free Report)