The deadline in the debt ceiling showdown in Washington approaches, with a government shutdown possible on Friday, Oct. 1. Democrats in the House have passed a bill that would avert a shutdown and suspend the debt ceiling temporarily, but that will go nowhere in the Senate without support from some Republicans.
Democrats have disagreements within their party as well over a $1.2T infrastructure bill and a $3.5T reconciliation bill. A temporary spending bill would need to pass Thursday night. Congress has raised the debt ceiling more than a dozen times in the last 20 years, with the last major face-off coming in 2011 between the GOP and the Obama administration.
"Today's macro environment is very different from previous debt ceiling episodes over the past decade," BlackRock Investment Institute strategists led by Jean Boivin write. "An economic restart is underway in the U.S., and inflation pressure has increased amid pandemic-related supply disruptions." "This is in contrast with the debt ceiling showdown in 2011 that triggered a downgrade in the United States' AAA sovereign credit rating by S&P just as the euro area debt crisis and worries about slower growth kept investors on their toes," Boivin says. "It also differs from 2018, when worries about U.S.-China trade tensions and their impact on the economy were flaring up."
Technical default: The deadline for the U.S. government defaulting on its obligations is further down the line, but not that far off. Without a suspension or raising of the ceiling, there will be a risk of default between Oct. 15 and Nov. 4, according to the Bipartisan Policy Center.
"Due to the unpredictability of cash flows - and thus, all debt limit projections - policymakers need to act in the coming weeks if they intend to ensure that all obligations of the U.S. government are paid in full and on time," the center's report says. That's something the two parties have never let happen and it's unclear what the impact would be to the full faith and credit of the United States and the economy.
In a worst-case scenario, Moody's Analytics says a prolonged standoff would cause another recession, this one akin to the financial crisis, with $15T in household wealth lost and 6M jobs lost.
"We believe Congress will ultimately reach an agreement to raise or extend the debt limit, but likely not until right before the Treasury exhausts its borrowing capacity," BlackRock's Boivin says. "The good news: Neither political party wants to see a technical default, and there are no calls for substantive spending cuts," he adds. "Hence we do not believe the debt ceiling represents a fundamental risk to the market."
"The risk: The timeline to resolve the debt ceiling is tight," he says. "Political brinksmanship appears likely, and any miscalculation could lead to a short-lived government shutdown that triggers market volatility."
Market impact: So far, the debt ceiling debate has taken a back seat on Wall Street to issues like the Fed, rising commodity prices, supply chain issues and China's Evergrande crisis. The S&P 500
(SP500) (NYSEARCA:SPY) snapped a two-week losing streak last week. And while Treasury yields have been rising, that's been more to do with the response to global central banks looking to remove accommodation.
"Risk assets could suffer temporary pullbacks after an extended run higher, but we favor looking through any volatility and staying pro risk over the next six to 12 months," BlackRock, who recently moved to Neutral in U.S. equities, says.
Bloomberg highlights a near-term risk to money market funds, as investors have tended to pull cash from those funds with the increase in risk of technical default that could hit T-bill prices. Those funds could turn further to the Fed's overnight reverse repo facility, which now stands at $1.28T. (
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