Renewed concerns over regional banks have been pushing regulators into uncomfortable areas, like facilitating and allowing the largest U.S. banks to get even bigger. Secretary Janet Yellen said, earlier this week, that more mergers might be needed. Programs being considered are to allow the FDIC to guarantee banks’ uninsured deposits, and there are now even proposals for blanket deposit guarantees.
In the meantime, trillions of dollars stowed away in short-term US Treasuries are looking anything but safe as the debt-ceiling deadline edges closer. Treasuries are normally viewed as the safest investments. But now, one-month Treasury bills due in June are being seen in the markets as potential trouble spots. Their yields have shot up over the last week or two, pushing them higher than the yields for two- and three-month bills. That’s not typical.
Future Wealth’s View
The US is another day closer to defaulting on its debt. The economic outlook is already uncertain, given the U.S. debt ceiling and falling commercial real estate values. Stress on U.S. banks could be a defining factor that pushes the economy into recession. The debt limit impasse could force the Fed to revisit options that the Fed Chair himself calls “loathsome”.
None of these conditions are good for stocks. For the first time since 2009, the 3-month U.S. Treasury bill rate is now higher than the yield on earnings for companies in the S&P 500 Index. Behind market fears of a default is the less-discussed risk of what would follow a deal. Many predict lawmakers will ultimately reach an agreement, but the standoff and the Treasury’s efforts to return to business as usual could wreak significant collateral damage. China is watching eagerly to pounce on the weakness in US fiscal stability.
At this point, the three best options we see for investors are to buy a CD, put the money in a high yield money market account or invest in long term treasuries. All of these options could generate a 5%+ return. We can’t say the same for the stock market near term.