For those who like their nostalgia served with more depression than the word normally assumes:
We think markets may well be able to continue without too much consternation through most of July, but if it becomes apparent that Congress will head out on its August recess – which lasts the entirety of that month – having made no progress, then fears of a delayed or missed payment should start to build. While some market swings are going to be difficult to position for until closer to any perceived deadline, some expressions – such as switches out of coupons with mid-September to mid-October payments and into those that should be better insulated – are relatively limited risk ways to position early, in our view.
Amid what is essentially early-stage positioning by the administration and party leadership, Treasury Secretary Mnuchin asserted that while they would prefer a clean raise before Congress departs in August, the government should have room through September, and has contingencies in case the debt limit is not addressed. For those readers who recall prior debt ceiling showdowns, this may evoke memories of ideas such as prioritizing payments, selling gold, or minting a trillion dollar platinum coin. Back in 2013 we discussed our views around potential options that the president and Treasury may (or may not) have at their disposal in the event that the debt ceiling is not addressed in time. Of course, should it reach a point where we are having serious discussions about which of those “super extraordinary measures” might be deployed, markets will not be sitting idly by. In the next section, we look back at past episodes in an effort to tease out how markets are likely to behave this time around.