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How to invest as the debt ceiling crisis looms

How to invest as the debt ceiling crisis looms

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This particular Pauline peril crisis ultimately ended in a compromise, but it was frightening enough to cause Standard & Poor’s to downgrade its rating on the US Treasury’s previously intact debt. Further downgrades can be expected this summer if there is a serious crisis. Borrowing costs across the economy will rise for some time – even though markets have an amazing capacity to recover from shocks and forget them after remarkably short periods.

This time, Congress must not only raise the debt limit before it is reached, but must also renew government spending authority by September 30 or force a shutdown of all but the most essential parts of the government. Such shutdowns are harmful — to consumers, federal workers and investors — but they have happened many times, including in 1995, 2013, 2018 and 2019. A breach of the debt limit would be a much more dangerous event.

Doug Spratly, who heads the cash management team at T. Rowe Price, said that debt ceiling problems have become so common in recent decades that he has a regular playbook that he will now start using again. “Every 18 months or two years I seem to do something like this,” he said.

As “Date X” approaches, he said, he will avoid holding Treasury securities that mature on that date and will make better use of the Federal Reserve’s resources to keep the money supply funds running smoothly. his company’s market.

What’s more, even if the Treasury does hit the debt ceiling, it will likely have enough funds to avoid a debt default for a while — although it will have to cut federal spending somewhere. And even with a short, subdued default on individual Treasury securities, Mr. Spratly said, money market funds would continue to function, with one caveat: In a big panic, with a massive selloff, “that’s going to be a problem of the government and the government will have to step in.”

However, panic is exactly what can happen if there is a Treasury failure. some money market funds were frozen during the 2008 financial crisis and bond funds were pressured in the market panic near the start of the 2020 coronavirus pandemic. Both types of funds could easily be disrupted again.

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