AUSTRALIA has $US12.3 billion ($11.2 billion) at risk in US treasury holdings, split between banks, superannuation funds and the Reserve Bank.
Failure to break the impasse in Washington over the debt ceiling will lead to a write-down in the value of the assets and leave Australian owners vulnerable to missed interest payments.
Investors have also been warned about the destabilising knock-on effect if the US loses its AAA credit rating, including mass selling and markets effectively shutting.
The US President, Barack Obama, is due to address the nation at 11am today Sydney time as the clock ticks down to tomorrow's deadline to reach a deal on lifting the ceiling. Although talks appeared close to resolution late yesterday, failure to lift the ceiling will shut government services.
Even if an agreement is reached, ratings agency Standard & Poor's has reserved its views on the country's AAA rating, with a downgrade depending on how much the US says it will save over the next 10 years.
US Treasury figures show the three biggest holders of US government debt are China with $US1.159 trillion, Japan with $US912.4 billion and Britain with $US346.5 billion. Australia is the 34th biggest creditor on the US table compiled in May.
Australia's sharemarket is expected to open lower this morning after hefty losses on Wall Street on Friday. The Dow Jones Industrial Average shed 96.87 points, or 0.8 per cent, to 12,143.24 points, while the broader S&P 500 Index lost 8.4 points, or 0.6 per cent, to 1292.28 points.
Local shares capped their worst monthly performance in more than a year on Friday amid the fear of a US default.
HSBC's chief economist, Paul Bloxham, said a possible downgrade of the US's prized AAA credit rating was "haunting" equity markets. A downgrade could trigger a mass reshuffle of world funds and the offloading of US assets.
"A lot of fund managers, pension funds and hedge funds have mandates to have a certain amount of AAA-rated securities in their portfolios. Probably all of them have US securities," he said.
"There would be a lot of reshuffling and heavy selling ... it's not a comfortable situation to be in."
Westpac's global head of fixed income strategy, Russell Jones, said it would depend on the legal obligation of AAA-mandated investment managers to sell whether US assets were dumped.
"Thankfully it would appear that relatively few are legally obligated to do so," he said. "On the other hand, to maintain the average ratings of their portfolios ... they may have to liquidate holdings of lower quality assets ... and this could cause these markets to seize up."
Frequently Asked Questions about this Article…
How much US Treasury exposure do Australian investors have at risk because of the US debt ceiling standoff?
The article says Australia has about US$12.3 billion (A$11.2 billion) at risk in US Treasury holdings. That exposure is split among Australian banks, superannuation funds and the Reserve Bank.
What could happen to the value of US Treasuries held by Australians if the US fails to lift the debt ceiling?
According to the article, failure to break the impasse could lead to a write-down in the value of those assets and leave Australian owners vulnerable to missed interest payments.
Could a downgrade of the US AAA credit rating affect my investments, and how?
The article warns that a downgrade of the US AAA rating could be destabilising: it might trigger mass selling, a reshuffle of global funds and potentially cause markets to seize up. Rating agencies like Standard & Poor’s are watching how much the US plans to save over the next 10 years before deciding on any downgrade.
Which countries are the biggest holders of US government debt and where does Australia rank?
US Treasury figures cited in the article show the largest holders are China (US$1.159 trillion), Japan (US$912.4 billion) and Britain (US$346.5 billion). Australia is listed as the 34th biggest creditor on the table compiled in May.
How has market sentiment reacted to the US debt ceiling uncertainty and what might that mean for the Australian sharemarket?
The article notes heavy losses on Wall Street—the Dow fell about 0.8% and the S&P 500 about 0.6%—and says Australia’s sharemarket was expected to open lower. Local shares had already capped their worst monthly performance in more than a year amid fears of a US default.
What could happen to portfolios that have to hold AAA-rated securities if the US loses its AAA rating?
The article points out many fund managers, pension funds and hedge funds have mandates to hold a certain amount of AAA-rated securities, and most hold US securities. A downgrade could force portfolio reshuffling and selling. Westpac’s Russell Jones notes relatively few managers may be legally obligated to sell immediately, but some could still liquidate other holdings to maintain portfolio ratings, potentially worsening market stress.
Does the article say when a resolution to the debt ceiling might come and what political events were happening?
The article reports the US President was due to address the nation at 11am Sydney time as the clock counted down to the next day’s deadline to reach a deal on lifting the ceiling. It also warns that failure to lift the ceiling would shut some government services.
Should everyday investors expect more volatility because of the US debt-ceiling impasse?
Yes — the article highlights that the debt-ceiling showdown and the possibility of a US downgrade are already creating market volatility and could trigger further heavy selling and destabilising knock-on effects, so investors should be prepared for continued uncertainty.
Call 1300 880 160
Start a chat
Schedule a call
