New York () — You might expect the stock market to soar after the White House and House Republicans reached a tentative deal to raise the debt ceiling, but the markets may have other plans.
The stock market, for the most part, has been ignoring the serious risks associated with a US debt default. Even if Congress passes a bill to raise the debt ceiling and President Joe Biden signs it, it could be months before stocks and other financial markets spring into action.
“One of the concerns I have is that even in the run-up to a deal, when it does happen, there could be substantial distress in the financial markets,” Treasury Secretary Janet Yellen said last week.
“We’re only seeing the beginnings of it,” he said, referring to the volatility in stock and bond markets in recent days.
House Speaker Kevin McCarthy 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) (Credit: Alex Brandon/AP)
The immediate market impact of a debt ceiling agreement
If the markets ultimately get what they want – no debt default – they will have to buckle up for a potentially tough ride immediately after the deal is signed.
That’s because the Treasury Department will have to immediately replace the cash it consumed during the extraordinary measures period when it couldn’t borrow more money.
According to Michael Reynolds, Glenmede’s vice president of investment strategy, this will create more competition from investors. After weighing their options, many investors may find that the return on investing in US Treasury bonds is better than that of stocks. That will temporarily soak up some liquidity from the stock market, he said.
A look back at the 2011 debt ceiling crisis
In 2011, lawmakers reached an agreement to raise the debt limit just hours before the United States went into default. Two days later, Standard & Poor’s downgraded the US debt rating for the first time in history.
It took two months for the shares to recoup the losses resulting from the downgrade and initial sales that led to the so-called X date, when the government no longer has the capacity to meet all of its financial obligations.
Could history repeat itself?
“It wouldn’t be surprising if the 2011 pattern were to repeat,” says George Mateyo, chief investment officer at Key Private Bank.
While he does not expect a major credit bureau to downgrade US debt before or after a deal to raise the debt ceiling is reached, he said the current stalemate could cause a major loss of confidence in the US financial system. USA.
That’s why he expects market volatility for months, even when a deal is reached.
“Just because we manage to raise the debt limit, we are not out of the woods,” Mateyo told .
