April 18, 2024


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How concerned are investors about the US debt ceiling?

How concerned are investors about the US debt ceiling?

  • Written by Natalie Sherman
  • Business Reporter, New York

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As negotiations drag on, investors seem to be pondering what happens next

Negotiations to prevent the US government from running out of money are heading towards Barky.

The Treasury Department says Congress must agree to raise the debt ceiling by June 1 or the US will run out of cash to pay its bills, spelling economic disaster.

Senior Republican Representative Kevin McCarthy says his party and the Democrats remain “apart”.

Fitch, one of the largest credit rating companies, said the impasse could prompt it to downgrade America’s credit rating.

So, with just over a week left – including the weekend – are investors finally getting nervous?

Marc Lindblom, of California-based Western Asset, which has more than $400bn (£322bn) in assets under management, said concerns had been “dominant in some conversations” with clients.

“There is a lot of fear mongering” by politicians and the media, he said. “It scares people so yeah, people are asking about it.”

All three of the big stock indices fell on Wednesday, extending declines from the previous day. Analysts say they expect Wall Street to remain on alert as it approaches June 1.

But for most of the month, markets remained remarkably unaffected, betting that the deal would go through.

“There will be a lot of terrible headlines in the media and politicians will certainly be there to try and score political points with their base, but there will be some sort of arrangement or agreement before you default.”

On Wednesday, the Speaker of the House, Mr. McCarthy, again sought to allay fears that the US could be veering off a fiscal cliff next month.

“We will not default,” he told reporters at the Capitol.

But the pressure on the situation is evident in select pockets of the market.

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Watch: Debt Ceiling Explained – In Less Than 90 Seconds

Investors demand higher payments for holding short-term US government bonds that can be most affected by default.

Gold, which investors often turn to in times of risk, has had a boost since the start of the year, and buyers have appeared unusually enthusiastic about the debt of certain companies.

“It was a very accurate market reaction,” said Eric Theoret, global macro analyst at Manulife, noting that the recurrence of debt standoffs over the past decade had many investors betting that this episode, like this one, would be a little more than “. short term flash.

As of Monday, he said, the broader market “hasn’t been trading like it has ever been.”

However, even if a deal is reached, market risks remain.

In 2011, the last time Democrats and Republicans were presented with such financial odds, the most severe upheaval occurred after a deal was struck.

Stocks experienced their biggest drop since the 2008 financial crisis, amid concerns about the impact of spending cuts made to get the agreement and the implications of a downgrade of US bonds by a single credit rating agency.

Despite concern about a credit rating downgrade in 2011, dire predictions that the US could face permanently higher borrowing costs due to damage to its reputation as a borrower have proven unfounded.

But the risks today, with interest rates already so high, may be different.

Analysts say they believe the possibility of another downgrade is remote, but the three rating firms have indicated they are keeping a close eye on what is happening in Washington.

Credit ratings agency Fitch on Wednesday placed the United States on negative watch – the first step toward a rating downgrade – citing “increased political partisanship” and weak governance compared to other top-rated countries.

“The policy of brinkmanship with regard to the debt ceiling, and the failure of the US authorities to meaningfully address the fiscal challenges in the medium term that will lead to an increase in the budget deficit and a growing debt burden, indicate downside risks to the creditworthiness of the United States,” the company said.

“It sure is stressful to watch,” said Rob Williams, managing director of financial planning and wealth management at Charles Schwab Financial, which he said is fielding inquiries from pensioners and others about how to handle the situation.

He said his team has been advising nervous clients to bypass the headlines: “If you have a plan and your circumstances don’t change, stay the course.”

Lindblom said Western Asset is also trying to reassure customers that an agreement will be reached, as has happened dozens of times before.

“This is political theater and this is the show,” he said. “It’s ugly sometimes but how our system works.”