US Debt Ceiling Deadline: Understanding X-Date

With negotiations underway, a US default remains a low but distinct possibility. When might the default “x-date” fall – and how will markets respond?

The US risks default in a matter of weeks unless Congress can reach a deal to raise the country’s borrowing limit.

While negotiations are underway, if the “x-date” (see below) passes without the debt ceiling being raised, coupon payments and redemptions of Treasury securities will stop.

While technical lapses have occurred – such as the 1979 check-processing glitch that delayed some redemption requests – a true default would be an unprecedented event with far-reaching ramifications.

Why the precise x-date deadline is uncertain

The x-date would mark the point at which the Treasury runs out of funds. After disappointing tax receipts for 2022, much now hinges on how revenue shapes up through May. If this can sustain the government into mid-June, when quarterly tax payments are due, the Treasury is likely to be able to make it through much of July and perhaps even to August.

US Debt Ceiling Deadline: Understanding X-Date

What needs to happen to avoid default?

After much internal wrangling, Republicans have unified behind one position and begun negotiations with the White House. Even if the two sides eventually strike a deal, as we expect, it would still need to clear Congress. Beyond the limited legislative timeframe, the main obstacle will be ultraconservative Republicans who could obstruct it by unseating the speaker to prevent bills from being brought to the floor.

However, some centrist Democrats are reported to have privately assured the speaker that they would come to his aid under such circumstances. President Joe Biden has also openly explored using section four of the 14th amendment, which states that the validity of US public debt “shall not be questioned”. But this unprecedented unilateral action could end up being struck down by the Supreme Court.

So although a default is unlikely, it should not be ruled out. As always, context is important. Investors would probably perceive any default to be a consequence of the fractious political environment rather than a fundamental inability of the US to meet its debt obligations. That being said, we still expect risk-off sentiment to grip markets over the coming weeks, which could be magnified by persistent concerns about the soundness of the banking system.

Investors’ portfolio response

Our message for investors therefore remains the same: hope for success, but plan for failure. Where possible, portfolios ought to be liquid and diversified to ensure capital can be redeployed quickly given the volatility seen during prior episodes of debt ceiling brinkmanship. However, it would be a mistake to assume that assets will perform as they did before. For instance, the rally in Treasuries during the 2011 standoff coincided with concerns about the eurozone debt crisis.

Outlook for Treasuries

While it is conceivable that Treasuries could perform well over the coming weeks, this is by no means guaranteed. Our strongest conviction is to have an overweight allocation to gold, even in spite of the recent rally, as well as towards AAA-rated sovereign issuance such as German Bunds. Alongside this, we would also expect safe haven currencies such as the Japanese yen and the Swiss franc to perform well against the US dollar.

Outlook for equities

On the other hand, equities will probably find themselves under the most pressure. But there is likely to be a wide divergence beyond the headline indices. Companies that have a heavy reliance towards US government spending or subsidies are likely to come under the most pressure. Whereas value stocks could hold up better, as should defensive and non-cyclical sectors such as pharmaceuticals

Strategic opportunities

Finally, for those willing to bet that Congress will manage to raise the debt ceiling in time, some investors may look to arbitrage the yield gap between T-Bills maturing before and after early June. Key to this will be timing, with the opportune moment being when concerns over the debt ceiling peak.

We are not yet at that stage, but it ought not to be far away.

US Debt Ceiling Deadline: Understanding X-Date

Contribute by Interactive Brokers, Author: George Brown

Author:Com21.com,This article is an original creation by Com21.com. If you wish to repost or share, please include an attribution to the source and provide a link to the original article.Post Link:https://www.com21.com/us-debt-ceiling-deadline-understanding-x-date.html

Like (1)
Previous May 19, 2023 12:39 pm
Next May 19, 2023 4:58 pm

Related Posts

  • The Vital Role of Immigration in the U.S. Labor Market: Benefits, Challenges, and Solutions

    The United States has been a melting pot of different cultures and nationalities for centuries, and immigration has played a significant role in shaping the country’s history, economy, and labor market. Immigrants have made invaluable contributions to the U.S. economy, bringing new skills, ideas, and perspectives to the workforce. However, immigration has also been a controversial issue in the United States, with some arguing that immigrants take jobs away from native-born Americans or drive down wages. In this article, we will explore the role of immigration in the U.S. labor…

    February 27, 2023
    2
  • Decoding National Debt: Ratios, Implications, and Fiscal Health Explained

    Introduction National debt is a topic that often dominates financial and political discussions. Despite its ubiquity, many people are unaware of what it truly means and the various metrics used to measure it. In this article, we will explore the definition of national debt, the significance of the national debt-to-GDP ratio, the national debt-to-income ratio, and how these indicators are used to assess a country’s financial health. What is National Debt? National debt, also known as public debt or government debt, is the total amount of money owed by a…

    March 26, 2023
    0
  • US Debt Ceiling: What it is and what it means for you

    Once again, Congress and the White House are wrangling over an increase in the debt ceiling. The stakes are high. Failure to do so would lead to a default on the federal debt, which could have far-ranging economic consequences. If history repeats, a deal will ultimately be reached. In the meantime, political uncertainty could disrupt financial markets—and also create investment opportunities. Says Lars Schuster, institutional portfolio manager in Fidelity’s Strategic Advisers group: “It’s unnerving to see these headlines. The good news is that historically volatility in the markets tends to…

    May 11, 2023
    0
  • Navigating the Storm: Understanding and Overcoming the 2023 Commercial Real Estate Crisis

    In the ever-evolving economic sphere, the onset of the 2023 commercial real estate (CRE) crisis presents a challenging conundrum for investors and economists alike. This seismic shift has seen dramatic fluctuations in property values and rental returns, jeopardizing the financial stability of the entire real estate sector. The root cause of this crisis is multifaceted. Many are quick to point to the lingering effects of the COVID-19 pandemic, which has accelerated the trend of remote working, thus reducing demand for office spaces. Meanwhile, the rise of e-commerce has displaced the…

    May 20, 2023
    0
  • When Might the Next Economic Downturn Commence?

    All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only.  The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions.  This report and the information herein should not be considered investment advice or the results of actual market experience. In what might have been the last rate hike of the current monetary policy tightening cycle, the Federal Reserve (Fed)  raised interest rates to 5.125% on May 3.  Through the cycle that…

    4 days ago
    0
  • Inflation Tracker: When Will Prices Stop Going Up?

    Inflation is a measure of the increase in the price of goods and services over a given period of time. In recent years, the world has seen a significant rise in inflation rates, leading many people to wonder when prices will stop going up. This article will examine the causes of inflation and provide some insight into when prices may start to level off. One of the main causes of inflation is the increase in the cost of production. This can be due to factors such as higher costs for…

    February 6, 2023
    0
  • Navigating the Complexities of the Global Grain Market: Challenges, Impacts, and Investment Opportunities in Agriculture

    Introduction Grain production and consumption are critical aspects of global food security. As the world’s population continues to grow, ensuring a stable and sustainable food supply chain becomes increasingly important. This article examines the current situation of grain production and consumption, major exporting countries, the impact of the Russo-Ukrainian conflict on grain exports, challenges to global food security, and investment opportunities in the agriculture sector. Grain Production and Consumption Global grain production is dominated by a few key players, including the United States, China, India, Brazil, and Argentina. These countries…

    April 23, 2023
    0
  • The Consequences of the U.S Debt Limit: Understanding the Importance and Solutions

    The United States is approaching its debt limit, and the Treasury Department is taking special measures to avoid default. The debt limit, also known as the “debt ceiling,” is the maximum amount of money that the U.S. government is legally allowed to borrow. When the government reaches the debt limit, it can no longer borrow money to finance its operations, which can have serious consequences. If Congress does not raise the debt limit, the government would have to rely on its limited cash reserves to pay bills and make payments,…

    January 21, 2023
    1
  • The Debt Ceiling: A Brief History and Its Potential Impact on the Economy

    The debt ceiling is a legislative mechanism restricting the total amount that a country can borrow or how much debt it can be permitted to take on. Several countries have debt limitation restrictions. The United States debt ceiling is a cap on the total amount of money that the U.S. Treasury is authorized to borrow by the U.S. Congress. The debt ceiling was created in 1917 to help finance World War I. The debt ceiling has been raised or suspended 88 times since 1960. The most recent increase was in…

    April 1, 2023
    0
  • Navigating the Economic Storm of the 1970s: A Retrospective on the Causes and Solutions of Stagflation

    Stagflation is a term used to describe a period of economic stagnation coupled with inflation. The term was first coined during the 1970s, when the global economy experienced a period of high inflation and slow growth. In this blog post, we will examine the causes, development, and resolution of the 1970s stagflation, as well as the lessons that can be learned from this period. The causes of stagflation in the 1970s can be traced back to a number of factors. One of the main causes was the oil crisis of…

    January 26, 2023
    0

Leave a Reply

Your email address will not be published. Required fields are marked *