Opening Bell: Default by another name

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10 THINGS BEFORE THE OPENING BELL

Happy hump day. Phil Rosen here. By now I'm sure you've read plenty about a potential US default, but there's some nuance worth delving into here, regardless of whether lawmakers agree to raise the debt ceiling. 

Today we're talking about faith, creditworthiness, and the sheer size of the American bond market.


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Janet Yellen

1. Let's get one thing straight: If we avoid a worst-case scenario of a national default, that doesn't exactly put the country in the clear.

President Joe Biden and House Speaker Kevin McCarthy this week have voiced optimism on a deal being reached, so credit agencies like Moody's, Fitch, and S&P Global have so far stayed the course with an upbeat outlook, too. 

But in another possible scenario, the government could keep making bond payments, but skip out on other obligations like payments to government contractors or social security recipients. 

So just because the US skirts a traditional bond default doesn't mean it's out of the woods in regard to potential damage to its creditworthiness. 

In March, Republican lawmakers floated the idea of "prioritizing debt," or paying off certain obligations ahead of others. 

Janet Yellen cautioned that this approach would simply be a "default by another name."

Should the government go down this path, Fitch has indicated that the country's credit status could actually still be downgraded from its current top-notch AAA rating

Here's the kicker: the US's creditworthiness is critical to the risk-free reputation of its Treasury market, and the world's faith in the American economy. The fear is that a downgrade could send investors fleeing the world's largest debt market, driving up borrowing costs for the government and, in turn, households and businesses. 

To me, that sounds like bad news. But according to Josh Lipsky at the Atlantic Council, the reality is investors around the world don't have an alternative to American bonds.

"The problem for any investor looking for safety in the wake of a US default," Lipsky wrote in a Tuesday report from the think tank, "is that the US Treasury market is much larger than any similarly-rated government bond market."

Sure, German bonds offer safety, as they're the only other AAA-rated debt issuer among G7 nations, but the German debt market is one-tenth the size of America's.

Lipsky concludes that there's no other safe place for investors to park their cash, which makes politicians' current standoff all the more maddening. 

Because, as he puts it:

"The US government issues something the rest of the world desperately wishes it had."

What's your outlook now on a potential US default? Tweet me (@philrosenn) or email me (prosen@insider.com) to let me know.


In other news:

Miami housing market

2. US stock futures fall early Wednesday, as investors closely eye debt-ceiling talks and wait for the Fed to release the minutes from the FOMC meeting held on May 2-3. Check out the latest market moves.

3. Earnings on deck: Amazon, NVIDIA, and BlackRock, all reporting.

4. Goldman Sachs recommended 30 cheap stocks that could begin to outperform in a slowing economy. These inexpensive names have stable earnings growth and offer promise even in a downturn. See the full list.

5. Russia's looking to India for help in avoiding a financial black list. The warring nation warned that oil and weapons deals could be at risk if it ends up on an FATF list just like North Korea, Iran, and Myanmar. Full details.

6. Tech stocks are the only game in town right now. DataTrek Research views the red-hot sector as the most promising corner of the market, as it's gained 27% since January. If you subtract tech names, the S&P 500 would only be up 2.5% in 2023.

7. The housing market has become so local that the price-growth gap between Miami and San Francisco is nearing 30-year highs. Compared to a year ago, homes in the Bay Area are down 10.1% in price, while those in South Florida are up 10.9%. Still, San Francisco's median sale price remains 2.9 times higher than Miami's.

8. A 27-year-old started "Airbnb arbitrage" after getting laid off during the pandemic. He explained how he got his first rental with $6,400 upfront — and scaled to 25 units in less than two years.

9. The chief investment strategist at Citi Global Wealth laid out the top three opportunities in tech stocks being "left behind" by investors chasing the AI boom. As names in the artificial intelligence sector take center stage, it'll be easy to overlook certain parts of the market that are also set to benefit. Read more.

Yelp stock price on May 24, 2023

10. Yelp stock rallied on Tuesday after an activist investor reportedly called on the board for a potential sale. TCS Capital said the company could rake in nearly double the current share price, per the Wall Street Journal. On the news, the stock saw its biggest single-day jump since August.


Curated by Phil Rosen in New York. Feedback or tips? Tweet @philrosenn or email prosen@insider.com.

Edited by Max Adams (@maxradams) in New York and Hallam Bullock (@hallam_bullock) in London.

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