US Five-Year Credit Default Swaps Hit Highest Price in a Decade.

$369 Billion of Tax Credits for Clean Technologies in Inflation Reduction Act.

25 Apr

Here is what we will be getting into today:

  1. U.S. Debt Ceiling

  2. US Manufacturing Growth

Let's Dive In!

US Government Default Concerns Rise as Debt Ceiling Debate Continues

 

The cost of buying insurance against a US government default has reached its highest level in over a decade, indicating market concerns about the political impasse in Washington over the debt ceiling. The price of us five-year credit default swaps, the most widely traded form of debt insurance, reached its highest since 2012 this month. While a default on US federal debt is still viewed as unlikely, investors are moving to protect themselves against the possibility or to profit from a protracted game of chicken that upends markets.

The new Republican leadership of the House of Representatives is demanding deep federal budget cuts in exchange for lifting the debt ceiling, while the administration says it will not negotiate. Wall Street is braced for the most contentious tussle since at least 2011, when a stand-off over the debt ceiling led to the US losing its top-notch triple A credit rating. At 46 basis points, the price of five-year credit default swaps remains well below levels hit during the 2008-09 financial crisis, but the bond market has also indicated nerves about the possible default date.

Money market funds in the US are facing a new challenge after the political stand-off over the US debt ceiling. Money market funds have seen more than $440bn in deposits since early March, largely into government money market funds that invest heavily in short-term Treasury debt. A prolonged stand-off in Washington over raising the federal borrowing limit could create difficulties with buying and selling this short-term debt, potentially leading to losses for money funds. Storing cash overnight with the Fed is an alternative to buying Treasury bills, but it has the potential to create additional strain on the banking system. The exhaustion of the US government's borrowing ability during this crisis would cause a significant amount of volatility for money market funds.

Investors are expecting the fight to go down to the wire as a stalemate between the White House and the Republican party looks unlikely to be resolved before the threat of default becomes imminent late summer. Leading policymakers have underscored the immense consequences of a US default for the global economy and financial system. US Treasury secretary Janet Yellen has warned that a default would lead to catastrophe. Congress has had frequent high-stakes confrontations over the debt limit in recent years without sparking a default on government debt. The debt ceiling was last raised in December 2021, when Republican Senate minority leader Mitch McConnell capitulated to Democratic demands.

Investment soars in US semiconductor and clean-tech production

The manufacturing industry in the United States is currently on an upswing as companies are capitalizing on the subsidies provided by the Biden administration. The Inflation Reduction Act and the Chips Act, passed in August 2022, provide over $400bn in tax credits, grants, and loans to encourage domestic semiconductor and clean-tech manufacturing.

Since the passage of these two industrial policies, over 75 large-scale manufacturing announcements have occurred in the US, with companies committing around $204bn to boost US semiconductor and clean-tech production. This is almost double the capital spending commitments made in the same sectors in 2021 and nearly 20 times the amount in 2019. The surge in spending pledges is headed to Republican-held Congressional districts, where it will create 58,000 jobs, despite the GOP's votes against both the Chips Act and IRA in Congress.

About a third of all investments announced since August involve a foreign investor, with nearly two dozen projects coming from companies headquartered in Japan, South Korea, and Taiwan. These investments from the US's Asian allies are also attempts to diversify away from dependence on China's supply chains.

The competition is fierce to win the largest manufacturing projects, with states doling out historic incentive packages to secure investments. Of the spending commitments made, less than half disclosed the size of the subsidies they will receive from state and local authorities, on top of the credits available in the IRA and Chips Act. The total size of the subsidies for those that did disclose them amounted to $13.7bn. The subsidy race has raised concerns among watchdogs over whether the projects will deliver economic benefits to the community.

The investment in semiconductor and clean tech sectors is part of the Biden administration's efforts to decarbonize the US economy. The Inflation Reduction Act includes $369bn of tax credits for clean technologies. The Chips and Science Act includes $39bn in funds to stimulate semiconductor manufacturing and $24bn worth of manufacturing tax credits. Both are also designed to break US dependence on Chinese supply chains. More projects are expected to be announced in the coming months as the US government provides more guidance on the tax credits.

 

For more analysis on these topics, check out these articles:

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