Debt ceiling worries to take center stage

As the government shutdown concerns exit stage left, the debt ceiling worries take center stage.  By law, the debt ceiling will return on March 2nd, where it is expected to be set at the current level around $22 trillion.  To the surprise of no one, political leaders are not expected to reach a quick resolution at the beginning of next month and Treasury Secretary Mnuchin will execute extraordinary funding measures, those measures should last until August or possibly September.

The bond market is already showing a dislocation on the Treasury bill curve with bills maturing on August 15th posting a yield of 2.502%, higher than the September 12th bill’s yield of 2.482%, suggesting when markets expect debt ceiling concerns to peak.  Further disruptions on the curve could heighten concerns on liquidity and that is something the markets haven’t focused on since mid-2017.

The Treasury will need to see an end to tax season before they can know how long their extraordinary funding measures will last.  Until then, we will likely see volatility pick up in the money markets and if we see investors avoid short-term debt and as the political debate will begin, concerns will raise for a technical default.  The base case remains for Congress to reach an agreement on raising or keeping the debt limit stable in the summer, but the politics will keep this messy.  Rating agencies will voice concerns on the debt level and risks to the U.S.’s AAA credit score will likely grow as the US lawmakers will struggle to reach a timely agreement.

If we see ugliness playout and an agreement on the debt limit seems less likely, risks will grow for the US to default, interest rates would rise, stocks would selloff and the dollar would plummet, with the yen being the biggest beneficiary.  The doomsday scenario is unlikely, but it will be one of the more important risks the market will focus on once we are completely passed the government shutdown concerns and trade war.

 

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Ed Moya

Ed Moya

Senior Market Analyst at OANDA
With more than 20 years’ trading experience, Ed Moya is a market analyst with OANDA, producing up-to-the-minute fundamental analysis of geo-political events and monetary policies in the US, Europe, the Middle East and North Africa. Over the course of his career, he has worked with some of the world’s leading forex brokerages and research departments including Global Forex Trading, FX Solutions and Trading Advantage. Most recently he worked with TradeTheNews.com, where he provided market analysis on economic data and corporate news. Based in New York, Ed is a regular guest on several major financial television networks including BNN, CNBC, Fox Business, and Bloomberg. He is often quoted in leading print and online publications such as the Wall Street Journal and the Washington Post. He holds a BA in Economics from Rutgers University. Follow Ed on Twitter @edjmoya ‏
Ed Moya