U.S. Treasuries: from safe haven to risky asset

<p>Last
week, Moody's downgraded the U.S. credit rating from stable to negative, citing
high budget deficits, deteriorating debt affordability and political
polarization.</p><p>It's a
little strange that they are just now realizing this, isn't it?</p><p>The
problems mentioned arose long ago, primarily due to irresponsible policies
during the pandemic. Maybe the monetary helicopter idea wasn't the best after
all.</p><p>By
pulling the economy out of the Covid-19 mess, we could be setting ourselves up
for an even worse crisis in the future. The situation is becoming
unsustainable. </p><p>And yet
the agency maintains the country's long-term rating at AAA…Could it be that
they are waiting for a miracle not to happen and the <a href="https://uk.advfn.com/newspaper/igorkuchma/69563/debt-ceiling-disaster-avoided-but-only-for-now" target="_blank" rel="follow">debt will not disappear</a>, or do they simply not
want to fall foul of the significant forces?</p><p>Just
because you don't see the problem doesn't mean it isn't there</p><p>Investors,
judging by the dollar index's lack of reaction, seem unperturbed by the news of
Moody's downgrade, with demand for Treasuries rising and yields falling.</p><p>The
reason for such optimism could be that the country has consistently met its
obligations to creditors. But in reality, it is a myth; albeit technical, there
have been defaults.</p><p>The
first "de facto" <a href="https://en.wikipedia.org/wiki/United_States_debt_ceiling#Legislative_history" target="_blank" rel="follow">U.S. default</a> occurred in the late 18th
century, when Congress announced the devaluation of "continental
dollars" and then agreed to redeem its bonds at 1% of face value.</p><p>Then, 70
years later, in 1860, there was a nasty story with Greenbacks for $60 million,
and in the end, the investors received 50% of what was promised. These
actions can be considered as an acknowledgement of insolvency.</p><p>Then
came the default of 1933. Bonds totalling $7 billion were issued to finance
World War I. On paper, the collateral was gold, thus a safe haven at the
time. </p><p>However,
at the request of President Roosevelt, Congress passed a resolution denying
U.S. holders payment in gold, devaluing the dollar by 40% compared to foreign
currencies.</p><p>Interestingly,
in February 1935, the Supreme Court upheld the congressional resolution as
constitutional. Chief Justice Charles Evans Hughes called the resolution
"amoral" but legal. </p><p>In 1979,
there was already a technical default of US$122 million, albeit a very brief
one. Even so, the government had to pay additional interest for the delays.</p><p>What
prevents the Government from repeating history?</p><p>Although
there have also been some dark episodes in the history of U.S. debt repayments,
this does not mean rushing to get rid of Treasury bonds. </p><p>It is
necessary to act according to the current situation</p><p>Despite
the fact that the debt reached a growth rate of $2 trillion a year, and this
year's budget deficit is up 23% over last year to $1.695 trillion, default is
not yet <a href="https://www.cbsnews.com/philadelphia/news/default-us-debt-ceiling-limit-government/" target="_blank" rel="follow">on the horizon</a>.</p><p>However,
if the geopolitical situation in the world continues to deteriorate and the
government continues to spend money like there is no tomorrow, risk will
increase.</p><p>Eventually,
US Treasuries may turn from safe assets to risky assets. At that point, it is
recommended to keep an eye on <a href="https://www.tradingview.com/scripts/volume/" target="_blank" rel="follow">the volume indicator</a> to understand the market
sentiment.</p>

This article was written by FL Contributors at www.forexlive.com.