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 frightened about what might be a drawn-out battle over elevating the U.S. debt ceiling later this yr.

The US Treasury is predicted to succeed in 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 reminiscent of local weather change and new social applications.

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

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

“The problem McCarthy needed to win speaker and the concessions he needed to make … spotlight the tough street forward for him to boost 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 have 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 Normal & 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 slim 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 believe that is going to be essentially the most contentious debt ceiling debate in reminiscence,” Winograd mentioned.

A few of these issues might already be taking part in 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 house the place the debt ceiling danger begins to develop,” Norris mentioned.

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The Bipartisan Coverage Middle predicted final yr that within the absence of congressional motion, the day would probably come when the federal authorities wouldn’t be capable of 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 be capable of 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 could be gathered to boost the debt ceiling with a mixture of Democrats and a few reasonable 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 prevented,” Cantrell added.

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

Nonetheless, others imagine that further 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 Delight, 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, Delight mentioned.

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

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

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