Treasury bills are safe

The consequences of a possible US default

The financial market is based on trust. And when that confidence wanes, the market returns rise as the price for the higher risk. That is generally true. It works a little differently on the so-called repo market: the lenders buy securities from the banks - but with the condition that the financial institutions buy these securities back after a certain period of time.

For example, the banks obtain money from the central banks, but these only accept certain securities as collateral. US government bonds are considered very safe, so they are also used there. In the case of short-term US Treasury bills, traders have reportedly observed that some money market funds and banks no longer accept them as collateral. But that is not yet a noticeable movement, says Ilona Korsch, head of bond trading at Bankhaus Hauck & Aufhäuser:

"Individual cases can be observed when we look at the money market, for example American bills, that is: If we look closer at US Treasury bills with terms of up to one year, we find that the returns here have been within the last three to four weeks these papers have tightened somewhat and yields have skyrocketed over the last few days. "

This can be observed in individual countries:

"For example, we recently heard from the Hong Kong Exchange & Clearing Limited that they would increase the discount on US Treasury bills with corresponding short maturities from one percent to three percent. This is about collateral in the derivatives business, but I would address that now do not overestimate. "

When the Lehman banking house collapsed, it could be observed that the collateral that was supposed to cover the loans was no longer available. As a result, confidence in the repo market also crumbled among other investors. Five years ago, the Lehman bankruptcy was worth half a trillion dollars. However, the US Federal Reserve estimates that around 2.8 trillion US federal bonds are currently being deposited as collateral on the repo market. Even if the movements are not noticeable, the nervousness of investors is somewhat reflected in the market, explains bond trader Korsch:

"One-month papers or even shorter papers, i.e. one-week bills, are the first thing that will not be served if the USA should fail. That means, the shorter the remaining term, the higher the risk. Nonetheless, we are still in areas around that zero percent. Four weeks ago we had exactly one one-month bill at zero percent. If you now take a new one-month US bill, it has a return of 0.25 percent. "

But what would actually happen if the USA actually defaulted on October 17, that is something financial market experts do not dare to imagine. There has never been a technical default.