Special Release - Debt Ceiling Theatrics

Tanya Carson West Financial Services

The main concern for markets in the coming weeks is negotiations on the debt ceiling. Recently, Treasury Secretary Janet Yellen raised the stakes when she moved up her estimate of a possible default to June 1st. As that date approaches, investors are becoming increasingly concerned with the debt ceiling debate, and the ramifications should the U.S. government be in default.

The debt ceiling has been a recurring news item every few years for decades, with both sides reaching an agreement each time in the past. Is this time different? Negotiations have been ongoing since last week, but June 1st is looming large. The debates will continue until a resolution is found, possibly at the last minute. A default by the U.S. government is extremely unlikely, with the closest comparison being in 2011, when the nation’s debt was downgraded by Standard & Poor’s. The risk of a possible default this time around has already impacted markets, most notably in short-term treasury bills. Treasury yields have risen dramatically for issues with maturity dates at the beginning of June, due to the heightened uncertainty.

Beyond recent events, investors have a renewed interest in treasuries, as rising interest rates have made them attractive for the first time in many years. The big question now is what happens if the government fails to make a deal in time and is not able to pay all their bills. As this has never happened before, there is little clarity whether certain groups possibly receive payment priority. This would affect not only bond holders, but recipients of government programs such as social security and Medicare. The most likely scenario would be a delay in the coupon and principal repayments for maturing debt until they can raise the debt ceiling. Until they can reach an agreement, the pressure is on lawmakers to come up with a plan, and quickly.

While the debt ceiling debate is causing volatility and uneasiness in the short run, previous instances are little more than a footnote in market history. For investors, who have no control over politics and tax policy, it is important to focus on their own goals, asset allocations, while keeping their emotions in check. If you would like to discuss the debt ceiling topic and how it relates to your situation in more detail, please contact a member of your team here at West.

Meet Tanya B. Carson, CFA »


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