US Debt to hit the Ceiling as Washington remains Paralyzed

After months of growth in the treasury reserves the current scenario appears grim as there is a strong likelihood of credit degrading of the US economy. The most immediate fall out of this phenomenon is that the investors will either look for greener pasture elsewhere across the globe or opt for government bonds that can keep their money safe.

UBS Ag, one the few traders dealing directly with the federal reserves, has predicted that due to this situation the treasury bonds are all set for another round of rally as investors seek secure avenues. The political infighting coupled with a complete paralysis on critical decisions that have pending now for quite some time will scare away the investors in pumping in money into the industries and services throughout the US.

The Impending Disaster

The Moody’s is contemplating a downgrade on US economy as early as the March of the current year. Additionally the Congress Budget Office is also predicting an exhaustion of funds to run the government expenses within the month of Feb due to high ratio of debt servicing commitments that is present presently. The reasons it states for the conditions include:

  • The deficit due to uncollected federal taxes worth $600 billion and the unchecked expenses that popular government projects are draining away.
  • By 31 December 2012 the US debt had reached its peak resulting in the current situation.
  • The US budget that has now been concurred by the Congress, has done nothing regarding the reduction in trade deficit thus making sovereign-rating downgrade inevitable.

The Rating Outlook

Most of the prominent rated companies have unanimously indicated a downgrade on the US economy given the prevailing circumstances. Despite the fact that the AAA rating will still be available for the US economy the downgrade of status is unlikely to be avoided.

  • The Fitch Ratings is quite confident that it’s predictions regarding the downgrade will take place sooner than it initially estimated and that the other companies will follow suit in this regard.
  • Standard & Poor’s have already made their move by downgrading US to AA+ well before the current situation became prevalent.
  • The Bloomberg Bond Trader prices have influenced the 10 year yield to 1.89 which is down by one basis point as on date. This shall have a snow balling effect leading to further decline in the days to come as investors’ loose confidence in the sustainability of the system. The yield had actually risen to about 1.97 by Jan 4 after witnessing a steady upward movement from March last.

This however may not influence all investor to take their money to foreign shores as the long term forecast of the economy still stay robust and the likelihood of a quick turnaround is very high. In case the Obama administration is convinced and firm about initiating determined action in this regard, the chances are bright that the US economy will regain its ratings by the end of the present year.

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Published by Steve Hackney

Steve Hackney is a corporate finance professional with over 14 years of experience in cash management and investing. He earned a Bachelor of Science in Finance from Florida State University and holds a Certified Treasury Professional certification. Steve lives in Orlando, Florida with his family.