Wednesday, October 2, 2013

A Perfect Storm: The Shutdown and the Debt Ceiling

When will the U.S. government re-open for business?  Apparently, Congress is working on it.  But while they are working on it, we're not sure how hard they are working on a possibly bigger problem:  the onset of another "debt ceiling."  A debt ceiling occurs when Congress fails to authorize the government to borrow more money to meet its obligations.  U.S. Treasury Secretary Jack Lew has told Speaker of the House, John Boehner, that the U.S. will hit its debt ceiling on October 17, 2013.  Meaning that, on that date, the U.S. Treasury will no longer have authority to borrow money to meet obligations, including payments on U.S. Treasury bonds.  I'm not sure anybody really believes it's likely that the U.S. will default on payments to bondholders but, given the chaos in Washington right now, we might go a little longer before the debt ceiling issue is resolved. Markets may have to price in the risk that doomsday will occur.  This could have a severe impact on bond pricing and the value of the dollar (a negative impact) over the next week or weeks.  Here is a nice article on Slate discussing the current situation:

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