U.S. Debt Ceiling Impasse and Investment Implications
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Text on screen: Jerry Woytash, Portfolio Manager, Short-term desk
Woytash: A lot of financial advisors and their clients have been raising concerns about the debt ceiling standoff in Congress and its impact on U.S. Treasuries.
Images on screen: US Capitol building
U.S. government debt markets are often referred to as the deepest and most liquid markets in the world. The interest rates on U.S. government debt serve as a benchmark that most other assets are priced relative to. A large part of why Treasuries have been used as the benchmark rate for other investments is that investors think of them as having the lowest risk profile and the least amount of uncertainty.
Text on screen: The debt ceiling dynamic may look very different as the deadline for Congress comes into focus
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So although we think it’s too early to say that the debt ceiling is a threat to this. If the government opted to not pay its debts - even for a brief period of time, then it would be unprecedented and the market impact would be difficult to predict.
The impact on broader financial markets has thus far been limited. This is not surprising since it is uncertain how raising the debt ceiling will play out and the debt ceiling is just one of many risks that the global economy faces.
Images on screen: Commercial bank exterior, bank transaction
Generally, money markets are primarily impacted because the Treasury issues fewer bills than usual until the debt ceiling is raised. Counterintuitively, this increases liquidity in money markets as investors are forced to seek out alternative ways to invest their cash.
Text on screen: Increasing T-bill issuance can potentially provide liquidity opportunities for active managers
Images on screen: US Treasury building
After the debt ceiling issue is resolved, we expect that the Treasury will rebuild its cash balances by increasing bill issuance – providing an opportunity for active investors to help provide liquidity.
As the debt ceiling showdown continues over the coming months, we think this is just one of many factors that could create episodes of market volatility which investors should consider as they allocate capital in 2023.
The primary thing investors should do is to ensure that they are prepared for multiple outcomes. At PIMCO, we are constantly reviewing liquidity management and operational procedures to ensure we are prepared for a wide variety of outcomes.
Amid uncertainties, it is important for investors to stay diversified and PIMCO’s active management approach can help investors navigate the changing landscape-
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