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Congress has suspended the debt ceiling until Jan. 1, 2025, even
as worries over rising U.S. debt were fueled earlier this week
when the Congressional Budget Office (CBO) forecast a jump in
the deficit to $1.915 trillion for fiscal 2024 and $1.938
trillion for 2025.
"I certainly worry about debt sustainability. The path of U.S.
deficits is highly unsustainable," Gennadiy Goldberg told the
Reuters Global Markets Forum (GMF).
"We'll get the first whiff of politicians starting to come under
a bit of pressure when the U.S. credit rating is downgraded
again ... possibly as soon as next year."
S&P downgraded its U.S. credit rating for the first time in
history during the 2011 debt ceiling crisis, which prompted the
passage of the Budget Control Act of 2011 to cut spending and
identify deficit reduction measures.
Goldberg said there was a risk that S&P will downgrade its U.S.
sovereign rating by another notch, this time from AA+ to AA.
Last year, Fitch downgraded its U.S. long-term credit ratings,
and Moody's lowered its outlook to 'negative' from 'stable'
signaling an increased risk of a downgrade.
The 5-year credit default swaps (CDS) on U.S. sovereign debt
indicate some worry, Goldberg said, as spreads have not receded
to the levels they were at the past few years.
The convexity-adjusted spread on the 5-year CDS, one of the
most-traded contracts during crises, is at around 40 basis
points this month, almost double the past five-year average,
data from HIS Markit showed.
Still, some market participants see a limited impact from a
sovereign rating downgrade due to lack of suitable alternatives
to high-quality liquid assets such as U.S. Treasury securities.
"Curiously, the term premium in the U.S. hasn't materially
increased in recent months, suggesting the demand for U.S. debt
remains quite strong," Goldberg said.
"The big question is whether that demand will persist, and who
will buy the bonds once that demand cools."
(Reporting by Mehnaz Yasmin in Bengaluru; Editing by Divya
Chowdhury and Kim Coghill)
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