February 2023 / VIDEO
What Investors Need to Know About the U.S. Debt Ceiling
The impasse over raising the debt ceiling may roil markets
Key Insights
- Given the potential consequences for the U.S. economy, failing to increase the debt ceiling should not be an option, in our view.
- But several factors could intensify the political jostling and take the negotiations to raise or suspend the debt limit down to the wire.
- Volatility in the bond and stock markets would likely increase as the U.S. Treasury gets closer to running out of money to pay its obligations.
Video Transcript
In the past decade, Congress has raised the statutory U.S. debt limit seven times.
Given the potential consequences for the US economy, failure should not be an option.
That said, the process of getting there could roil the markets.
Let’s explore why and examine the possible implications.
In the past, Republicans have reluctantly supported raising the debt ceiling without any strings attached.
But now that they control the House, some Republicans have been vocal about using the debt ceiling to push their goals of cutting government spending and lowering the national debt.
Democrats, meanwhile, have said they won’t negotiate on expenditures that have already been approved by Congress.
Two factors could intensify the political jostling and take the negotiations down to the wire.
1. Republican Speaker of the House Kevin McCarthy needed an unprecedented 15 voting rounds and significant concessions to win the role.
This drawn-out process suggests that the debt ceiling debate could be especially contentious, as McCarthy seeks to unify his Republican caucus.
2. Because Congress has successfully suspended the debt limit in the past, investors may be too complacent. That worries me.
If markets shrug off the stalemate in Congress, some lawmakers may be emboldened to push even closer to the edge of crisis.
What could this brinkmanship mean for investors?
Volatility in the bond and stock markets would likely increase as the U.S. Treasury gets closer to running out of money to pay its obligations.
And investor sentiment could take a bigger hit if fears about the debt ceiling coincided with a marked deterioration in economic data.
But the worst-case scenario would be if the potential fracas led to a downgrade to the United States’ credit rating or the government missing a debt payment. So many assets are priced off U.S. Treasuries–the resulting turbulence would be felt in markets worldwide.
Given the consequences of failure, Congress should find a way to extend the debt ceiling. But the journey to get there is unlikely to be smooth.
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February 2023 / ENVIRONMENTAL, SOCIAL, AND GOVERNANCE
Michael Pinkerton is an associate investment analyst covering legislative and regulatory research, primarily focused on domestic public policy, in the U.S. Equity Division.
