An Update on the Debt Ceiling Debacle

Transcript:

Jared Kizer: All right. So I wanted to jump on here recording on Monday, May the 22nd, and provide another update related to the ongoing discussions to increasing the federal debt ceiling again, which was reached back in January. And we've started to see just a tremendous amount of reporting around the ongoing negotiations of how we're going to get to a point where that debt ceiling is going to be increased and the Treasury can start issuing more debt to be able to finance the budget that's not covered by tax revenues. So today, what I'm going to do, try to keep it relatively brief and focus on the updates that we know as of this Monday that I'm recording and what we think is going to happen over the balance of the week, maybe into the next week.

Has There Been Any Progress in Debt Ceiling Negotiations?

Jared Kizer: So a deal was hoped for over the weekend. There was a good bit of optimism, at least in the press reporting and from some of the political folks saying there was a possibility that a deal could be reached related to the budget over the weekend, but we did not see that occur. So a deal was not reached over this past weekend. And we know that as of today, again, Monday, May 22nd, we've got Biden and McCarthy supposedly meeting today with, I'm sure, lots of other folks continuing the negotiations related to the budget.

Are Budgetary Discussions Being Tied into the Debt Ceiling Resolution?

Jared Kizer: And that is the central issue here. Of course, the Republicans are trying to tie in the congressional vote on increasing the debt ceiling into the budgetary discussions, basically trying to bring things in meaningful dollar amounts out of the budget. And that's where all the dialog is at this point in terms of the budget being tied to the increase in the debt ceiling.

When Will the Treasury Run Out of Funds to Run the Government?

Jared Kizer: There's still, though, some uncertainty in terms of when the Treasury is going to run out of funds to be able to keep the government running, of course, pay principal and interest, Social Security, all the other things that the federal government is involved in. But we did see over the weekend Yellen say, and let's take this at face value, that it was unlikely, given current cash levels, that the Treasury would be able to make it to June 15. So if you believe that we've got certainly a short window here that the politicians are having to work around related to coming to some type of agreement on the debt ceiling. So I expect we're going to see a ton of meetings this week, potentially into the next week.

Is a Deal Expected in Advance of a Default?

Jared Kizer:. I still believe, as I mentioned in the prior recordings and other folks that have asked me that, we will see a deal in advance of any kind of default, although as I've said, the risks are certainly higher than we've seen in the past events of 2011 and 2013. If you force me to guess, I would expect that we probably will see this continue into next week, even though there will be lots of negotiation discussion this week. But my guess is we're going to just see this go to the very, very last moment. Purely a guess at this point, trying to read the tea leaves of what we're seeing in the negotiations and likely how far apart the sides are related to budgetary agreements.

How Have Markets Responded to the Debt Ceiling Debate?

Jared Kizer: Switching in focus to markets, the main thing that we've seen in markets so far, pretty muted response by and large. So, we've not seen a lot of volatility in equity markets and I think that's a great reminder of this is probably not the time to try to make big portfolio adjustments. The only real movement that we've seen that seems to be clearly related to the debt ceiling is a big, big increase in yields on very, very short-term Treasuries. Those are the securities that are likely most directly in the crosshairs related to this, going in the direction none of us want it to go. So, we have seen those Treasury bill yields increase.

How Could a Possible Debt Limit Resolution Materialize?

Jared Kizer: If you asked me to guess, I'll finish up here on any possible resolution structure like what might it look like again, on the timeline, I said my expectation we'll see this go into next week and not even be resolved this week. Again, purely a guess. If you had me to guess on the structure of the resolution, my guess is we'll see a relatively modest increase in the debt ceiling or a relatively short timeline where the debt ceiling is suspended. I'd be personally surprised if we saw something much larger than that, which means we could be seeing this pop up again down the road. But that would be my best guess given the political dynamics of what a resolution form might take. So hopefully some helpful notes on kind of where we sit at this point and in late May related to the debt ceiling. If you have additional questions you like for us to tackle, feel free to reach out to your advisor and suggest those topics or click the link below and submit questions in that way. Thanks.

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