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

Yesterday, SEC Chairman Gary Gensler spoke at the ISDA annual meeting in Chicago. The main topic was the regulator’s plans to overhaul the Treasury market, but he couldn’t help but talk about the idiocy of the debt ceiling.

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

Although we at the SEC have no direct role in these discussions, the outcome is directly tied to every part of our mission: to protect investors, facilitate capital formation, and maintain fair, orderly, and efficient markets.

We have already seen an effect on the price and liquidity of short-dated Treasuries and continue to monitor any further jolts.

If the US Treasury as an issuer were to actually default, this would have very significant, difficult to predict, and likely long-lasting effects on investors, issuers, and markets.

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

(Strictly speaking Gary is more than a word.)

For readers intrigued by the Cyclone reference, it’s because the SEC Chairman was recounting how President Franklin Roosevelt signed the Securities Act of 1933 the same day he opened the Chicago World’s Fair and announced it as the beginning of a “century of even greater progress”. ”.

For what it’s worth, fears of default are probably a little overblown. The White House is likely to prioritize paying the debt, and while there may be a crash, just cut all other payments and let Republicans suffer the political fallout from soldiers, police, elderly people, etc. who are not paid.

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

That said, the markets are clearly worried. One-year US credit default swaps have now climbed nearly 150 basis points, topping highs seen in previous debt ceiling standoffs.

However, beyond the comments on the debt ceiling debacle, speech is a pretty good overview of all the SEC wants to do with/for (delete in its own opinion on the quality of these reforms) the $24 billion Treasury market.

These primarily include expanding central clearing in USTs, registering all affected brokers, regulating a wave of new trading venues, and promoting greater transparency in US government debt trading. It’s a subject that Alphaville is. . . interested. We think you should be too.