Uncle Sam's Credit Line Running Out?

The yield curve and credit-default swaps tell the same story: The U.S. can't borrow trillions without paying a price.

WHAT ONCE WAS UNTHINKABLE has come to pass this year: massive bailouts by the Treasury and the Federal Reserve, with the extension of billions of the taxpayers' and the central bank's credit in so many new and untested schemes that you can't tell your acronyms or abbreviations without a scorecard.

Even more unbelievable is that some of the recipients of staggering sums are coming back for a second round. Or that the queue of petitioners grows by the day.

But what happens if the requests begin to strain the credit line of the world's most creditworthy borrower, the U.S. government itself? Unthinkable?

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Trillions are no hyperbole. The Treasury is set to borrow $550 billion in the current quarter alone and $368 billion in the first quarter of 2009. "Near-term pressures on Treasury finances are much more intense than we had thought," Goldman Sachs economists commented when the government announced its borrowing projections last week.

It may finally be catching up with Uncle Sam. That's what the yield curve may be whispering. But some economists are too deaf, or dumb, to get it.
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The steepening of the Treasury yield curve has been accompanied by an increase in the cost of insuring against default by the U.S. Treasury. It may come as a shock, but there are credit-default swaps on the U.S. government and they have become more expensive -- in tandem with an increase in the spread between two- and 10-year notes.

This link has been brought to light by Tim Backshall, the chief analyst of Credit Derivatives Research. The attraction of investors to the short end of the Treasury market is "juxtaposed with the massive oversupply and inflationary expectations of the longer end," he writes.
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Cutting through the technical jargon, the yield curve and the credit-default swaps market both indicate the markets are exacting a greater cost to lend to Uncle Sam. And it's not because of anticipated recovery, which would reduce, not increase, the cost of insuring Treasury debt against default.

All of which suggests America's credit line has its limits.