Analysis: Investors brace for US debt ceiling battle after House Speaker saga

NEW YORK (Reuters) – The turbulent begin to the brand new U.S. Congress has some buyers anxious about what may very well be a drawn-out battle over elevating the U.S. debt ceiling later this yr.

The US Treasury is predicted to achieve the $31.4 trillion borrowing restrict in 2023, and Republicans see this as a chance to restrict President Joe Biden’s spending on Democratic initiatives corresponding to local weather change and new social packages.

Whereas battles over elevating the debt restrict are nothing new in Washington, some buyers concern that the GOP’s slender majority in Congress might give occasion hardliners the higher hand, making it a lot tougher to achieve an settlement this time round.

Final week’s protracted battle to elect Republican Kevin McCarthy as Speaker of the Home could present an image of the fierce legislative battles forward: McCarthy’s election required 15 rounds of voting, during which he lastly gained after making broad concessions to right-wing hardliners. The 14 failed votes constituted probably the most votes for Speaker since 1859, within the turbulent years main as much as the Civil Battle.

“The problem McCarthy needed to win speaker and the concessions he needed to make … spotlight the tough highway forward for him to lift the debt ceiling,” mentioned Maria Vassallo, chief funding officer, Multi-Asset Options at Goldman. Sachs Asset Administration.

Frequent legislative confrontations over debt limits over the previous decade had been largely resolved earlier than they spilled over into the markets. Nonetheless, this was not at all times the case, and a protracted standoff in 2011 prompted Commonplace & Poor’s to downgrade the US credit standing for the primary time, sending monetary markets reeling.

Eric Winograd, chief US economist at Alliance Bernstein, mentioned a number of components, together with slender majorities and a variety of viewpoints in Congress, might imply that “this debt-ceiling episode is as devastating or maybe much more disruptive than the one which occurred in 2011.”

“I feel that is going to be probably the most contentious debt ceiling debate in reminiscence,” Winograd mentioned.

A few of these issues could already be enjoying out within the markets, at the same time as buyers proceed to focus totally on macroeconomic points like inflation and financial coverage.

Calvin Norris, portfolio supervisor and US worth strategist at Aegon Asset Administration, mentioned Treasury yields due between October and December this yr point out some issues in regards to the debt ceiling.

On Tuesday, these yields — which transfer inversely with costs — ranged between 4.67% and 4.75%, greater than the 4.57% yield on the one-year invoice due in September, indicating that buyers are demanding greater yields to carry the paper.

“That may point out that there’s some sort of premium being revamped billings in that area the place the debt ceiling threat begins to develop,” Norris mentioned.

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The Bipartisan Coverage Heart predicted final yr that within the absence of congressional motion, the day would possible come when the federal authorities wouldn’t have the ability to meet all of its commitments earlier than the third quarter of 2023.

For now, debt ceiling fears are taking a again seat for buyers, whose focus is on the financial fallout from aggressive price hikes by the Federal Reserve designed to manage inflation.

Some buyers additionally imagine that lawmakers will have the ability to attain an settlement on elevating the debt ceiling with out making markets too jittery.

Libby Cantrell, Pimco’s public coverage chief, mentioned she believes if “strain” happens sufficient votes will be gathered to lift the debt ceiling with a mixture of Democrats and a few average Republicans.

“It is not that it will not be bumpy alongside the best way, however we’re extra assured that the worst-case state of affairs shall be averted,” Cantrell added.

Edward El Husseiny, senior foreign money and rate of interest analyst at Columbia Threadneedle, believes any debt ceiling tensions will finally be resolved, calling the difficulty a “well-rehearsed story.”

Nonetheless, others imagine that additional warning could also be warranted.

Involved that the Fed’s actions will hamper the financial system and company earnings, funding agency Glenmede has been on the defensive, underplaying equities and growing money and stuck earnings, mentioned Jason Pleasure, the corporate’s chief funding officer for personal wealth.

Nonetheless, rising issues in regards to the debt ceiling are “another small justification up entrance” for the corporate’s standing, Pleasure mentioned.

“You’ve got a home the place the management hasn’t froze,” Pleasure mentioned. “This should jeopardize the state of affairs.”

(Reporting by Louis Krauskopf and David Barbuscia); Modifying by Ira Usbashvili and William Maclean

Our requirements: Thomson Reuters Belief Ideas.

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