As I write this, the major averages are retreating to session lows in reaction to yet more political posturing out of Washington D.C. The fear in the air is palpable as investors try to make sense of the tense exchanges between two houses of Congress.
But while we are drawing closer to the deadline to raise the deficit ceiling, it’s not time to panic, not by a long shot. If you take a moment to consider the way the markets and Congress have behaved in the past week or so, the picture becomes clearer. My money is on this scenario: That a deal will be worked out in the dead of night on October 16, before the markets open in Asia. The reason is that no one wants to hurt the full faith in the credit of the United States.
Consider this: Last week, one-month Treasury bond yields tripled. They went from 0.08% to 0.27%, a sign of eroding confidence in short-term U.S. debt. There was a fear that Fidelity National Financial (FNF)—the big fund company—would dump treasury securities and that money market funds may break the buck. No one wants to lose money in their money market assets, so that caused Congress to quickly get their act together last week and a rally to
So I do expect a deal to be done. But even if the calendar turns to October 17 and the deficit ceiling is not raised, there is a non-Congressional option. Going off of the 14th Amendment, the government is required to pay the interest on its debts. President Obama could use his power to fund parts of the government himself. While certain services are self-funded—like Social Security, he’d have to make some tough choices about other services based on cash flow.
But I consider this highly unlikely. Elected leaders on both sides of the aisle want to raise the deficit ceiling—they’re just arguing over how long. At the end of the day, we can’t avoid the mess in Washington D.C. —but that doesn’t mean we should panic over it.