May 2023 / INVESTMENT INSIGHTS
Implications of the Debt Ceiling Showdown for Investors
As the “x-date” approaches, our portfolio managers and experts are closely monitoring developments
As the date approaches when the U.S. Treasury Department will no longer be able to meet its obligations unless the legislative limit on the national debt is raised—the so‑called x‑date—investors may have questions about the implications for the economy and markets. We recently gathered T. Rowe Price fixed income and equity portfolio managers, as well as the firm’s economists and regulatory analysts, to share their insights about the fluid situation and how they are preparing for the possibility of volatility ahead.
Q: How likely is a debt ceiling crisis (and will this time be different)?
In the view of T. Rowe Price Washington, D.C., Associate Analyst Michael Pinkerton, the political jostling could take negotiations further down to the wire.
While he acknowledges that the hurdles to an agreement have proved larger than expected, Michael still believes that Congress is likely to again find a way to avert a default on the government’s debts.
Markets appear to have reacted positively to recent reports of progress on an agreement from both President Joe Biden and Speaker Kevin McCarthy.
“There was an overwhelming consensus…that defaulting on the debt is simply not an option,” Biden said in remarks following a May 16 meeting with Republican leaders, although he cautioned that “there’s still work to do.”
Q: When will the government run out of money?
U.S. Treasury Secretary Janet Yellen has continued to warn that the “extraordinary measures” the Treasury is taking now that the government has surpassed its official debt limit might be exhausted as soon as June 1.
The actual date the government runs out of cash remains a moving target based on several unknowns, but April’s individual tax receipts came in somewhat below expectations—making upcoming data on corporate tax receipts even more important.
If the Treasury manages to conserve enough cash through June 15, when corporate tax payments are due, the next crucial date for an agreement might be late July or early August.
Q: What is the likelihood of an agreement to temporarily extend the debt ceiling?
Both President Biden and Speaker McCarthy have publicly disavowed any intention of agreeing to a “kick‑the‑can,” short‑term extension of the debt limit.
T. Rowe Price’s Michael Pinkerton believes that a temporary extension remains unlikely. An extension is only probable if the two sides agree on a topline cut in government spending.
In this scenario, White House and congressional negotiators would then be given a window to decide on where the specific spending cuts would fall.
Q. What happens if neither a short‑term nor a long‑term agreement is reached?
If the government runs out of cash, some believe that the Treasury Department would then choose to prioritize payments to those who own U.S. Treasury securities (e.g., bills, notes, and bonds).
However, Secretary Yellen has stated that “Treasury systems have all been built to pay all of our bills when they’re due and on time and not to prioritize one form of spending over another.”
The potential impact on Social Security payments, for example, remains unclear.
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