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What Happens to Fixed-Income ETFs With Debt at $18 Trillion?

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Imagine for a moment, an uncontrolled spender whose credit limit has just been suspended. That means this self-destructive spendthrift can continue their spending spree without any accountability. Imagine no more, because that out-of-control spender is the U.S. government.

It’s been less than a month since Congress reached a temporary deal to suspend the U.S. government’s debt ceiling, and the Treasury Department has already wasted no time by amassing another $389 billion in new debt.

This time around, suspension of the U.S. debt limit, which was previously fixed at $16.69 trillion, means the Treasury Department can effectively spend whatever amount of money it needs or wants.

How much debt can the U.S. government rack up by the next debt ceiling deadline on Feb. 7? At the current spending pace of $129.6 billion per week, U.S. public debt would top $18.77 trillion by early February.

What about the argument that this $395 billion in new debt was simply a payback from the accounting wizardry (or as Jack Lew called it “extraordinary measures”) the U.S. Treasury used over the past several months to avoid exceeding the previous debt limit?

Factually, these “extraordinary measures” are tantamount to accounting shenanigans and nothing more. Any corporation or corporate executive that attempted to use the U.S. Treasury’s same accounting methods would be charged with fraud.

Lamentably, the U.S. government’s accounting games are no longer a secret.  

“When you are the largest economy in the world, when you are the safe haven in all circumstances, as has been the case, you can’t go into that creative accounting business,” said International Monetary Fund Managing Director Christine Lagarde in an interview with NBC News’ “Meet the Press.”

For now, the bond market is ignoring the U.S. debt conundrum.

After reaching a yearly high of 2.97%, the yield on 10-year U.S. Treasuries has since fallen by around 13%. In other words, the bond market is expressing the view that the fiscal realities of the U.S. government’s rising debt load simply don’t matter. And over the past two months, that’s kept Treasury bulls celebrating. 

ETFs that benefit from lower yields and higher Treasury bond prices like the ProShares Ultra 20+ Yr. Treasury ETF (UBT) and the Direxion Daily 20+ Yr. Treasury Bull 3x Shares (TMF) have gained 6% to 9% since early September.

Treasury bonds with long-term maturities (TLT) like those tracked by UBT and TMF are most sensitive to changes in interest rates compared with Treasuries (SHY) with maturities of less than 10 years.


The ETF Advisor Pro uses a combination of market sentiment, fundamental/technical analysis, history, and common sense to be on the right side of the market. Since the beginning of the year, 74% of our time-stamped ETF picks have turned a profit (through 9/30/13). Follow us on Twitter @ ETFguide.