It will be an economic “catastrophe” if the US fails to raise its debt ceiling, warned treasury secretary, Janet Yellen, last week. Should investors be worried? Markets might appear unconcerned. Stocks have been calm and major figures like Warren Buffett and Bill Gross have dismissed the possibility.
The debt ceiling has been revised higher 78 times since 1960. Despite recent political wrangling, markets assume another deal will be done. There is, however, potential for volatility. Investors have not forgotten 2011, when threats of a default badly roiled markets.
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The White House’s Council of Economic Advisors notes some signs of stress are already evident. The cost of insuring US debt rose “dramatically” in April and is at all-time highs.
Similarly, the yield on treasury bills maturing in coming weeks has increased “considerably”. JPMorgan’s David Kelly says volatility will rise if a deal isn’t done by late May, with a “major market meltdown” likely if the debt ceiling is not increased in time. Other analysts warn the issue may get increased attention as early as this week.
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A US default is very unlikely but not unthinkable, given today’s ultra-polarised and increasingly extreme political environment. JPMorgan chief executive, Jamie Dimon, says he would “love to get rid of the debt ceiling thing” altogether. It’s hard to disagree.
