Quick Comment on the Looming Debt Ceiling Crisis

By Published On: May 22, 2023Categories: Market Commentary2.2 min read

The US government hit the ceiling on its ability to borrow money in January, and since that time it has used special accounting maneuvers to pay its obligations. The government expects to run out of available cash sometime in June—perhaps as early as June 1—which could trigger potential defaults on payments to bondholders, as well as other missed payments.

A default by the US government has not happened before, and while the ensuing impact is unknown, most observers anticipate it would have serious repercussions for financial markets. The brinkmanship over the debt ceiling debate in August 2011 highlights this point, when the S&P 500 dropped over 15% in two weeks.

What Might Occur?

Conjecture is difficult given the lack of precedent. Our quick thoughts are:

  • We think Congress and the President understand the fragility of the situation enough to come to a mutually agreed upon deal. There’s too much at stake to allow even the risk of default.
  • That said, reaching a deal will likely be very bumpy. It could be a last-minute agreement that settles the issue, or it could take several steps—such as a temporary suspension of the debt ceiling through the summer to buy more time to reach agreement. We would be surprised if the decision drifted into 2024, however, given the Presidential election cycle.
  • Reaching no agreement at all by early June would not be good, but we note that it does not mean immediate default by the US government necessarily. We would expect the US government to prioritize paying bondholders until an agreement is reached, thereby avoiding technical default, and suspend most other financial obligations. Not paying government workers or fulfilling key government services is not sustainable for long, so we anticipate a deal would be reached before true defaults occur.
  • As events unfold, we would look to make adjustments in, and even take advantage of mispriced opportunities for, client portfolios, within client risk profiles.

Implications for Investment Portfolios

  • From an investment standpoint, we do not recommend changing your allocation strategy if your goals and lifestyle have not changed. We build portfolios to navigate volatility in both equities and fixed income.
  • In particular, over the last 18 months, where appropriate for clients, we have added defensive components to our equity strategies—in addition to the defensive role of fixed income—to recognize the potential risks caused by rapidly rising rates and inflation.
  • We are also monitoring our holdings of Treasury securities in our client portfolios, with a keen eye to T-bills that mature during the summer and fall. Most clients have limited exposure here, and those that do have customized strategies.

Any questions, please let a member of our team know.

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