A week later, we are still here - no progress has been made in the U.S. debt ceiling discussions as best we can tell and the house should be voting on their plan tomorrow with the senate later in the week. However a new twist has been brought to the story. Based on the latest numbers, the U.S. treasury managed to find a lot more cash in their back pockets, sufficient to allow them to get by for at least another week. Then the money REALLY runs out.
I doubt this is really something the Treasury wants to shout from the rooftops, as it would take the implied pressure off of the two sides that will ultimately need to do the unpleasant task of compromising. I was secretly hoping that the market would have been uglier yesterday to put a bit more pressure on Congress, but that failed to happen since everyone has been looking for a last minute agreement all along and remained unfazed (or sleeping on a hot summer afternoon?!). I imagine at this stage, both parties, surely aware of the new found leeway, are even more likely to hold out for a deal on their respective terms.
So what happens as the 2nd of August deadline passes? The risk of a downgrade would be raised even further. I've always thought of rating agencies as being completely rubbish but I would still hate for the US to be stripped of their triple As. I fear a big selloff in treasuries as well as equities in this scenario so I have decided to put on some protection, mostly in the shape of put spreads on the US contract with a September expiry. I'm short the higher strike and long twice the lower strike generating a small overall cost. It carries negatively as all outlier trades do but it's a small cost I am happy to bear, for now.
Good luck and have a good week ahead.
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