12 key points to consider on the debt ceiling and the markets
What are the potential global implications if fears intensify that the US could default on its debt?
Even a short-lived disruption of Treasury interest and debt payments would have affected the smooth flow of global financing and the pricing of other securities in the U.S. and abroad. U.S. government debt’s role as the risk-free benchmark means that distortions to U.S. Treasury debt pricing caused by the interruption of debt payments would ripple through other parts of the global bond market, potentially disrupting issuance and trading of seasoned securities.
Disruptions in the market for Treasury securities also would have a more direct effect on market liquidity, the institute said, related to their use as collateral in repurchase agreements and other funding transactions globally.
A debt default also could lift spread-sector interest rates by establishing a risk premium on government debt, adding to the base rate on other securities built on the Treasury benchmark. That added Treasury risk premium could be cemented by a downgrade of Treasury debt by a second legacy credit-rating agency (Moody’s or Fitch), making the AA+ rating on Treasury debt the commonly accepted rating in the global bond market.