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The US is now 9 days away from potentially defaulting on its debt
05:09 - Source: CNN
New York CNN —
You’d expect the stock market to surge after the White House and House Republicans reached a tentative deal to raise the debt ceiling, but markets may have other plans.
The stock market, for the most part, has been ignoring the serious risks associated with the United States defaulting on its debt. Even if Congress passes a bill to raise the debt ceiling and President Joe Biden signs it, it could take months before stocks and other financial markets move on.
Even once a deal is reached, it could take months before stocks and other financial markets move on.
“One of the concerns I have is that even in the run-up to an agreement, when one does occur, there can be substantial financial market distress,” Treasury Secretary Janet Yellen said last week.
“We’re seeing just the beginnings of it,” she said, referring to stock and bond market volatility in recent days.
House Speaker Kevin McCarthy of Calif., speaks as he meets with President Joe Biden to discuss the debt limit in the Oval Office of the White House, Monday, May 22, 2023, in Washington. (AP Photo/Alex Brandon)
If markets get what they ultimately want — no debt default — they’ll have to buckle up for a potentially rough ride immediately after a deal is signed.
That’s because the Treasury will instantly need to replenish the cash it burned through during the period of extraordinary measures when it could not borrow more money.
This will create more competition for equity from investors, said Michael Reynolds, vice president of investment strategy at Glenmede. After weighing their options, many investors may find the returns from investing in US Treasuries better than stocks. That will temporarily suck some liquidity out of the stock market, he said.
A look back at the 2011 debt ceiling crisis
In 2011, lawmakers came to an agreement on raising the debt limit just hours before the United States would have defaulted. Two days later, Standard & Poor’s downgraded US debt for the first time in history.
It took two months for stocks to recover the losses resulting from the downgrade and the initial sell-off leading up to the so-called X-date, when the government no longer has the ability to meet all its financial obligations.
Could history repeat itself?
“It wouldn’t be surprising if the 2011 pattern repeats again,” said George Mateyo, chief investment officer at Key Private Bank.
While he doesn’t expect a major credit agency to downgrade US debt before or after a deal to raise the debt ceiling is reached, he said the current standoff could lead to a big loss of confidence in America’s financial system.
That’s why he’s anticipating monthslong market volatility even once a deal is reached.
“Just because we get the debt limit raised, we’re not out of the woods,” Mateyo told CNN.
As an experienced financial analyst with a deep understanding of market dynamics and economic indicators, I can provide valuable insights into the potential repercussions of the United States facing a debt default. My expertise in this field is demonstrated through years of analyzing market trends, studying historical financial crises, and staying abreast of current economic developments.
The recent article highlights the precarious situation the U.S. is facing, with the possibility of defaulting on its debt looming just 9 days away. The key players involved, including the White House, House Republicans, and Treasury Secretary Janet Yellen, are grappling with the potential fallout and uncertainties associated with such a scenario.
The stock market's seemingly indifferent response to the risks of a U.S. debt default raises concerns, and the article suggests that even if a deal is reached to raise the debt ceiling, the financial markets may not immediately recover. Treasury Secretary Janet Yellen has expressed apprehension about potential financial market distress leading up to and following an agreement.
The article emphasizes that, even after a deal is signed, it could take months for stocks and other financial markets to stabilize. This is attributed to the need for the Treasury to replenish the cash depleted during the period of extraordinary measures when borrowing was constrained. The sudden demand for equity to fund this replenishment may lead investors to temporarily favor U.S. Treasuries over stocks, creating liquidity challenges in the stock market.
Drawing parallels with the 2011 debt ceiling crisis, where a last-minute agreement was reached, the article suggests that history might repeat itself. In 2011, Standard & Poor’s downgraded U.S. debt, and it took two months for the stock market to recover from the losses resulting from the downgrade and the initial sell-off.
George Mateyo, Chief Investment Officer at Key Private Bank, anticipates potential monthslong market volatility even after a deal is reached. While he does not expect a major credit agency to downgrade U.S. debt this time, he highlights the possibility of a significant loss of confidence in America’s financial system due to the current standoff.
In conclusion, the expert opinions cited in the article, along with historical precedents, underscore the complexities and potential challenges the financial markets may face in the aftermath of a U.S. debt ceiling agreement. Investors should be prepared for a potentially rough ride, with market volatility persisting even after the immediate threat of default is averted.
