After a two-year break, debt ceiling worries are back—and are likely to increase market volatility as we head into the fall.
In 2019, Congress voted to suspend the debt ceiling—a cap on the total amount of debt the United States can accumulate—for two years, until July 30, 2021. The U.S. Treasury has already begun employing “extraordinary measures” to ensure the United States does not default on its debts, but those measures are likely to run out sometime in October. Congress will have to raise or suspend the debt limit by then, and there’s no clear path to do so.
The most significant crisis happened in 2011, when Congress waited until the very last moment to avoid default. The Cboe Volatility Index spiked and yields on 10-year Treasury notes fell. The crisis peaked when Standard & Poor’s downgraded the credit rating of the United States for the first time ever, leading to what at the time was one of the most volatile weeks in the market’s history. Market unrest was a huge factor in finally pushing Congress to act just days before the country went into default. This scenario repeated itself, with varying degrees of volatility, during debt ceiling debates in 2013, 2017, 2018, and 2019.
The bottom line is that while the path to addressing the debt ceiling is unclear at this time, Congress has always managed to find a way, and the expectation is that they will do so again in 2021. But investors should be prepared.