US default would make Cyclone Roller Coaster ‘look like a kiddie ride’

Yesterday the SEC’s chair Gary Gensler spoke at ISDA’s annual meeting in Chicago. The main topic was the regulator’s plans to overhaul the Treasury market, but he couldn’t resist having a pop at the debt ceiling idiocy.

Gensler highlighted how fears that a default could ensue were creeping into markets, and warned that if it actually happened it could be a cataclysmic event. From the prepared remarks:

While we at the SEC have no direct role in those discussions, the outcome is directly consequential to each part of our mission: protecting investors, facilitating capital formation, and maintaining fair, orderly, and efficient markets.

We’ve already seen an effect in the pricing and liquidity of short-dated Treasury bills and continue to monitor for any additional tremors.

If the U.S. Treasury as an issuer were actually to default, it would have very significant, hard to predict, and likely lasting effects on investors, issuers, and markets alike.

In a word, it would make the Cyclone Roller Coaster at the 1933 Chicago World’s Fair look like a kiddie ride.

(Strictly speaking Gary, that’s more than a word.)

For readers puzzled at the Cyclone reference, it’s because the SEC chair was riffing off how president Franklin Roosevelt signed the Securities Act of 1933 on the same day as he opened the Chicago World Fair and heralded it as start of “a century of even greater progress”.

For what it’s worth, default fears are probably a little overblown. The White House is likely to prioritise debt payments, and, while there might be an accident, simply slash all other payments and let the Republicans wear the political fallout of soldiers, police, old people etc going unpaid.

The risk is therefore probably more economic than financial. If it triggers a recession (and immediate and massive cuts to government spending would almost certainly do the trick) it could even cause Treasuries to rally.

That said, markets are clearly worried. One-year US credit-default swaps have now rocketed to almost 150 bps, smashing past the peaks seen during past debt ceiling stand-offs.

Anyway, beyond the debt ceiling debacle comments, the speech is a pretty good overview of all the stuff the SEC wants to do with/to (delete according to own opinion on how good these reforms are) the $24tn Treasury market.

Mainly, these are broadening central clearing in USTs, registering all relevant dealers, regulating a rash of new trading platforms, and promoting greater transparency in US government debt trading. It’s a subject Alphaville is . . . interested in. We think you should be as well.