With all the news on the debt ceiling situation, we thought it prudent to share a  few insights. As you may recall, when similar brinksmanship over the debt ceiling occurred back in 2011, we likely came within two days of a default by the US  Government. As a result, the US lost its AAA rating by S&P, equity markets dropped, while the fixed income markets rallied.  

Even though a default could jeopardize Treasury payments, the credit risk of US  Treasuries is viewed as incredibly low. In fact, when bond traders quote interest  rates, they often refer to a spread between the instrument at hand and the “risk 
free rate.” The “risk-free rate” refers to the nominal yield of a similarly dated  Treasury. We’re not suggesting Treasuries are completely risk-free. Rather sharing this term to illustrate the high regard Treasuries hold by investors around the world when it comes to credit risk. Hopefully, that does not change. 

Some would argue the recent range-bound sideways trend in the equity market is partly due to the uncertainties of the debt ceiling. We’re not sure of this, but even if true, it doesn’t appear that the equity markets have priced in an actual US  default. For if the equity markets had done so, we believe the market would be substantially lower. It might be that the default risk is acting as a damper to significant upside due to the uncertainty. Should we get even closer to the deadline without a deal, one would envision a potential selloff in equities. That might also suggest a potential rally if things work out. If so, we imagine the collective spotlight will likely move back to inflation, interest rates, and the Federal  Reserve. Who would have thought we’d be looking forward to that? Ha! 

We’re here if you’d like to discuss this or anything else important to you. If there is a topic you’d like covered, we welcome your input!