According to bond giant Pimco, Congress and the White House are likely to reach an agreement to remove the US debt ceiling, but only at the last minute.
With the standoff expected to last, investors should brace for further market volatility before a debt ceiling deal can be reached, said analysts at Pimco, which manages $1.8 trillion in assets.
Analysts at Goldman Sachs and Bank of America have warned that the X-date, when the US government could risk hitting its borrowing limit and technically default on its debt obligations, could arrive sooner than originally expected. Some analysts have set the original X date as August.
However, with individual tax receipts well below year-on-year levels ahead of the April 18 due date, the Treasury sees higher funding needs and its liquidity buffer could become “dangerously low” ahead of June 15, the scheduled date for quarterly corporate tax payments. according to analysts at Pimco.
“As a result, we expect the Treasury Department to provide additional guidance soon – perhaps as early as next week’s announcement of the repayment,” the analysts wrote in a note on Friday. “It could also bring forward the acute phase of political volatility, which is important for the markets.”
The Republican-led House of Representatives on Wednesday approved a debt-limit bill that is unlikely to stand a chance in the Democrat-controlled Senate.
Read: Debt ceiling standoff: Here’s what’s next as House Republicans seek talks with Biden after passing their bill
Investors have put money into one-month Treasury bills
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with maturities before expected date X. Yields on such bills were nearly 4.13% on Friday, or below the Federal Reserve’s current range of 4.75% to 5%, suggesting investors are taking a premium on such bills pay.
To read: How concerns about the US debt ceiling may be affecting the markets
In contrast, Treasury bills with maturities near the projected X-date, which could fall from mid-June through August, offer higher yields and closer to the Fed Funds rate, according to Pimco analysts.
The 6-month Treasury yield
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was 5.03% on Friday.
However, should investors become increasingly concerned about the possibility of a default, given our past experience with the dynamics of the debt cap market, we would expect these yields to move much higher, perhaps more than 100 basis points higher,” the analysts wrote .
And volatility may not be limited to bonds. Investors should also expect increased volatility in the stock market, analysts at Pimco noted.
The average peak-to-trough return for the S&P 500 over the past 12 years
SPX
in the month before reaching a debt ceiling was around -6.5%, according to analysts at Pimco.
Certainly other factors have contributed to shaky markets as the US neared previous debt limits, such as: B. the European debt crisis in 2011.
Stocks ended April higher. The Dow Jones Industrial Average
DJIA
posted its best monthly performance, up 2.5% in April. The S&P 500
SPX
rose 1.5% and the Nasdaq Composite
COMP
up less than 0.1% over the month, according to Dow Jones Market Data.
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