Who here understands the DRASTIC effect refusing to raise the debt ceiling will have on the market?

[A HERETIC I AM]

16. Keep an eye on the 10 Year Treasury yield.

Last edited Thu Sep 30, 2021, 12:44 AM - Edit history (1)

It's risen about 20 Basis Points over the last week, but it is merely climbing back to where it was in June (~1.50 % )

https://finance.yahoo.com/quote/%5ETNX?p=%5ETNX


A serious spike in yield (a percent or more in a days trading) could indicate a serious selloff, and THAT would be bad news. If confidence in the integrity of Treasury Bonds begins to wane, holders will look to unload them, forcing prices down and yields up.

However, it is important to remember just how low yields are right now. That ten year paper is paying a coupon rate of 1.25% and is currently bid at a discount to par.

A true default would mean either interest payments are not made, or maturing securities are not redeemed on time or in full - or at all (ed. Or both) .

The worst case scenario would be failed auctions. The New York Branch of the Federal Reserve conducts the bond auctions for the Treasury, and if a given series (or several offerings, for that matter) of any paper are seriously undersubscribed, it means the pool of buyers is drying up, and they wont come back till yields go up enough to satisfy perceived risk. If interest payments are not made or a series is not redeemed on time, it is anyone's guess what the rate would be that would bring buyers back.

Keep in mind that during the Reagan years, the yield on the 30 year topped 12% ! Right now that bond is at 2.07% with a 2% coupon.

For perspective, 2% on a million dollars face value of these securities equals $20,000 a year in interest payments to the holder. It's peanuts.