My Short Treasuries ETF popped today: The Debt Ceiling is to Blame?

I have been short treasuries via the ProShares UltraShort 20+ Year Treasuries ETF (TFT) for a while because I think the government running the money printing presses will drive up inflation (and commodity prices) and thus hurt treasuries. However there seems to be more afoot according to this article.

The “big deal” is that the newly elected Congressional leadership is proposing a Constitutional Amendment which would require a balanced budget and this amendment will be tied to the passage of a debt ceiling increase. In other words, this will be the last time the debt ceiling will ever be lifted…assuming Congress doesn’t change the rules again (yes, I know a BIG assumption).  A Constitutional Amendment requires a 2/3 majority to pass, while a singular vote on the debt ceiling would require only a simply majority. It is this dynamic that is rattling the bond market.

I'm not sure how Congress can back-load a Constitutional Amendment like that but it sure seems to be freaking someone out. The amendment makes sense but it might damage things like NASA and our military preparedness if it isn't handled right. In my mind the idea of coming up with $1.171 trillion dollars to plug the budget hole every year is just mind boggling.

You figure a cap on the debt to GDP limit or something would be more feasible. Or maybe even tying spending raises to inflation or something would be an interesting fix. A back-loaded balanced budget amendment would be nuts right now. In any case here is the bear case for treasuries from this article.

Believe it or not there are credit default swaps (CDS) on US government debt. (I am not sure who will have any money left to settle the transaction if the US government ever did default, but that is a discussion for another day.)

As of yesterday’s close US government CDS prices have reached all time highs, suggesting the risk that the US will default on its debt has never been higher!

I had no idea that there was someone out there selling an instrument that protected against the potential default of the US government debt. You would think that this kind of thing wouldn't exist. If the US government defaulted on the debt there would be a world wide panic that will make Black Monday look mild profit taking. I guess there is always someone making a buck by insuring against (or betting on) a catastrophe like that. The fact that these things are at an all-time high should be quite worrying and higher interest rates are the least of these worries. The debt ceiling chicken might be a pretty good deal for TFT going forward.