How worried should you be about a U.S. government default? Apparently, pretty worried. Yesterday, USDC issuer Circle added $8.7B in overnight repos to their reserves. In addition, Circle has removed any exposure to treasuries maturing after May 31st, stating that these actions were taken to “provide additional protection for USDC in the unlikely event of a U.S. debt default.”
Overnight repos are short-term loans where the borrower/dealer sells government securities to investors on an overnight basis and buys them back the next day. Hence, the term overnight.
Overnight repos protect one from a U.S. default because the Federal Reserve or dealers are the ones paying “interest”. Dealers have their own balance sheet, which they can pay interest out of, and the Federal Reserve can print as much money as they want without adding to the deficit.
On the other hand, the treasury pays interest on treasury bills, and the TGA balance is looking alarmingly low at less than $200B. The treasury department is set to run out of cash by early June unless the debt limit is raised, and so far, lawmakers are deadlocked in raising the debt ceiling.
Slightly less important news this morning. Jobless claims fell by 22K to 242K, coming in below the estimates of 254K. I think by now we’ve all gotten the point that the labor market is as strong as ever.
What happens if the U.S. government defaults? The global financial market would require a pretty hefty reshuffle, given that the “risk-free rate” will cease to exist. Some think this could be a positive catalyst for gold and BTC.