Treasury exchange traded funds (ETFs) were lower Wednesday afternoon as investors worried about a potential government shutdown with lawmakers in Washington facing off before a Friday deadline.
As the country’s deficit grows to staggering proportions, the legal limit on the amount the U.S. government may borrow is quickly approaching, and the Treasury Secretary warns of possible debt defaults if no action is taken. While the possibility of the U.S. defaulting on debt seems rather ludicrous, U.S. Treasury bonds and other related ETFs may begin to sweat under the mounting pressure.
Treasury Secretary Timothy Geithner recently stated that the U.S. will hit a legal limit on its ability to borrow no later than May 16, commenting that “the longer Congress fails to act, the more we risk that investors here and around the world will lose confidence in our ability to meet our commitments and our obligations,” writes Rachelle Younglai for Reuters. As of last Friday, Treasury borrowing was just $95 billion shy of the Treasury’s projected $14.3 trillion statutory debt limit between April 15 and May 31. [Why Current Environment Is Affecting Treasury Yields and ETFs.]
Geithner has warned that failure to raise the debt ceiling in a timely fashion could force interest rates higher, causing a “financial crisis potentially more severe than the crisis from which we are only starting to recover.”
After unsuccessful attempts to resolve a budget plan that would cut $33 billion from current spending, the White House directed government agencies to face a temporary shutdown if the U.S. Congress does not pass a budget plan before midnight on Friday, reports Andy Sullivan for Reuters. While the new found prudence in budgeting may be a step in the right direction, the country still faces a deficit that is projected to hit $1.4 trillion this year.
Democrats want to preserve scientific research and education while reducing $2 billion in defense and security, whereas Republicans want increased discretionary cuts each year and reduce funding to dozens of priorities spearheaded by the Obama administration. [Treasury ETFs: Bill Gross Talks Book On Bonds].
MF Global analyst Chris Krueger, though, stated that their “odds remain above 50% that the government will not shut down on Saturday.”
For more information on U.S. Treasuries, visit our Treasury bonds category.
- PowerShares DB U.S. Dollar Index Bullish ETF (NYSEArca:UUP)
- iShares Barclays 20 Year Treasury Bond Fund (NYSEArca: TLT)
- PIMCO 7-15 Year U.S. Treasury Index (NYSEArca: TENZ)
- Vanguard Extended Duration Treasury ETF (NYSEArca: EDV)
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.