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Since Bill Gross’ Treasury short was announced, Treasuries have only rallied gone higher.One way he could end up spectacularly right is if the debt ceiling isn’t raised and the US goes into some kind of technical default. JPMorgan recently explained how that would likely sent yields far higher.
But it could end up exactly the opposite.
If the debt ceiling isn’t raised, the way for the US to avoid default is to cut off all discretionary spending, and funnel that money to interest payments.
As Matt Busigin of Macrofugue points out, an end to all discretionary spending would slam the economy and be wildly deflationary which would… be a gigantic boost for bonds, spending yields sharply lower.
Provided we didn’t default in anyway — not on bondholders or on entitlement recipients — we’d get a simultaneous hit to the economy and confirmation of willingness to make our payments, and Bill Gross’ Treasury short would go up in flames.
So many tail risks to consider.
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