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Nobel laureate and noted economist Paul Krugman said he's terrified of the possible implications of an actual default by the United States on its debt but believes ratings agencies are "just irrelevant."
Krugman's comments come at a time when Fitch Ratings placed the ‘AAA’ Long-Term Foreign-Currency Issuer Default Rating of the United States on Rating Watch Negative, in the wake of political stand-off between President Joe Biden's administration and Republican lawmakers regarding the debt ceiling crisis.
Fitch said its action reflects increased political partisanship that is hindering reaching a resolution to raise or suspend the debt limit despite the fast-approaching X date – the day when the government is expected to run out of options to fund itself.
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Krugman explained his stance by citing a chart that shows the trajectory of market yield on U.S. Treasury Bills at 10-year constant maturity. The economist indicated that following the S&P downgrade of the United States' credit rating in August 2011, there was hardly any major impact on treasury yields.
"I’m terrified about the possible implications of actual default. But the rating agencies are just irrelevant," he tweeted.
Krugman may be right about how treasury yields may react to a potential downgrade but it is notable that the bond market has been jittery due to the deadlock.
Yields on treasuries set to mature on June 1 and June 6, at one point on Wednesday, reportedly topped 7%. The iShares 1-3 Year Treasury Bond ETF (NASDAQ:SHY) closed 0.22% lower while the Vanguard Short-Term Treasury Index Fund ETF (NASDAQ:VGSH) lost 0.21% on Thursday, according to Benzinga Pro.
Developments: Meanwhile, Biden and House Speaker Kevin McCarthy are closing in on a deal that would increase the government’s $31.4 trillion debt ceiling for two years while limiting spending on most items, reported Reuters citing a U.S. official.
The deal, which has not been finalized, would increase funding for discretionary spending on military and veterans while essentially holding non-defense discretionary spending at current year levels, the report added.