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The Debt Ceiling and Your Investments


For those unaware, the United States looks set to once again hit its "debt ceiling" sometime this summer. What is the debt ceiling, exactly? It's a congressionally-mandated limit on the amount of debt the United States Treasury can incur. When will we reach this limit? While the exact timing is uncertain, estimates vary between early June and mid-August. Is this something we should be concerned about? Sort of, but only if you care about the short-term. While most everyone expects the debt ceiling will ultimately be raised, the timing of this resolution is in doubt as both President Biden and House Republicans have staked out widely different positions. It may, unfortunately, be up to financial markets to "force" a resolution upon Washington politicians. Markets would do this by tumbling precipitously.


I have been watching closely for any hint of trouble, particularly in the bond portion of client portfolios. To date, all I've seen is a slight bump in the yields of government bonds maturing in June and July (which is actually good). I believe the worst case scenario to be a short-term default. Here bond interest (and principal) may not be paid on schedule. However, that interest would, almost certainly, eventually be paid. Since FWM clients have diversified portfolios and are not 100% dependent upon the timely paying of the federal government's debts, I find myself relatively nonplussed.


That said, looking back on the 2011 example, it's certainly possible equities markets could gyrate wildly in the coming weeks until a resolution on the issue is reached. Swings of 10-15% are certainly possible. This may be extremely uncomfortable. Again, however, I don't see these swings as lasting (at least when it comes to this issue) and so they may, in fact, be used as an opportunity to purchase securities at temporarily reduced prices. With that possibility in mind, we're doing our "homework" now so we're prepared should an opportunity arise.

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