It does look like the speaker's going to have to 80s bring it to the floor, he
said at a news conference after then what?
Yeah. And good evening.
This is this is actually very important, Speaker McCarthy does look like he will
have the votes for this sort of opening bid.
This opening salvo, if you will. Of course, none of what the 218 will 219
or what have you will pass will end up getting into law.
But again, it sort of kicks off these negotiations as sort of an opening bid.
So what's next? And Majority Leader Schumer may bring
this bill up, let it fail, sort of to illustrate that there are not the votes
to pass the House. The House bill and have it signed into
law by the president for five and thirty threatened that he would veto it anyway.
But again, the most important thing, I think from a markets perspective is that
this sort of kicks off the process and likely will put some pressure on
President Biden and some of the Democrats to actually come from
negotiating, negotiating table with the Republicans in both the House and the
Senate to hammer out a deal. Libby, you're writing to clients today
that it will be a bumpy ride, but the destination is known.
The U.S. will not default.
So what form is this going to take? Will they actually agree to lift the
debt ceiling through May of next year or whatever the date ends up being or
suspend it for a couple of months while they figure out the path?
I think it's the sort of vast majority of folks in Washington and including the
President Biden to postpone or suspend or extend the debt ceiling, however you
want to phrase it, past the November 2024 election.
I think that will be part of the negotiation, Joe.
I think folks will be loathe to increase it for a short term.
Now, that is certainly possible. And as we've discussed, it depended on
when the exit date falls, that the exit date is closer.
It's early June. Then you may actually see a higher
likelihood of just a short term deal. But I think assuming that the date is
sort of late July, August around that congressional recess, I think they're
going to try to negotiate to try to punt this beyond the November trying
election. Again, I think that is one of the levers
that folks will pull in this negotiation.
We heard from President Biden had to say and he said he would happy happily to
meet with Speaker McCarthy, but he didn't mention the budget.
He just said he wants to make sure default is off the table.
Is at the White House potentially opening up slightly to some sort of
negotiation? Yet, look, I mean, the the White House,
like previous White Houses, have really tried to separate the debt limit from
spending discussions, because as we all know, the debt limit is backward
looking. It is simply allows the country to issue
more debt, to finance spending that's already been appropriated or obligated
or what have you. Thus, the budget discussion is more
forward looking. So President Biden is trying to kind of
strike that that balance or that new wants.
I'm not sure it's going to be able to hold.
I do think that the White House and Democrats realize that is just too
important. The stakes are just simply too high for
them. Deserve and fit on a clean debt ceiling
increase. We will be, though.
I do think there are some things, though, the Democrats give to
Republicans here that actually could benefit them politically as well.
One of them is this energy permitting bill, this this issue that has been
live, that Senator Manchin, a Democrat from West Virginia, had talked a lot
about. President Biden has already indicated he
would support this. So this could be sort of part of the
negotiation. So, again, I think that the bottom line
for free markets is we don't think there will be a default.
We think there will be a bumpy ride, may not be a deal until the eleventh hour
because this volatility in the markets. But there will be a resolution some way
somehow. Again, the stakes are just too high and
the political incentives are too clear to avoid to avoid default.
Libya was the default is not an actual or downgrade rather than an actual
default that hit the markets back in 2011.
What's the conversation like right now at places like S&P and Fitch as they
watch this unfold in Washington? How close to the X date do you think
they're willing to go this time before taking action?
Yeah, I think that's an open question. And for our clients, especially that are
very sensitive to downgrades, it is it is going to be something that they're
going to be monitoring quite, quite quickly or quite, quite closely.
Excuse me. I think Fitch is been the only credit
rating agency who sort of indicated that if we were to default and yet bond
payments were to be prioritized, that would still likely get default.
And that's important because there are some folks on the Hill who are arguing,
well, as long as bond holders like PIMCO that the world are being paid, it will
not be default. Fitch is sort of indicating, no, it
actually would be a technical default and that would have a cascading impact.
And that, of course, the case of default, which we don't think, again, is
likely. But again, an open question as to if
there is no resolution, you know, days before the date.
Well, the. Well, the credit rating agency moved
really to put the country on watch. And I think that's that's very possible.
At what point, Libby, does the market start to actually pay attention?
Yeah, I mean, we've been obviously talking a lot about this with our
clients. I will say this is our number one
question that we are getting from clients.
And the markets, as you well know, are starting to dislocate in some areas.
For instance, in the Treasury bills, lots of risk aversion, avoiding trying
to avoid the three months to bill from going into the one month bill, because
that doesn't necessarily fall under this date period of time.
And so we are already seeing some dislocation.
Again, that front end of the yield curve.
You're also seeing some dislocation in the CBS for U.S.
sovereign debt. That is a variance.
We've talked about very illiquid, very small markets.
So kind of pick it for what it is. But will wind as it sort of start
impacting the broader market. Usually the equity market is a laggard.
It doesn't necessarily react until the weeks, if not days before the X date.
So I think there's going to be a lot of kind of sanguine ness.
Until then, until folks get some more clarity around around the X date and if
there is no resolution, again, it's kind of weeks, weeks, days beforehand, then
that's when you start seeing about volatility.
And just really important point, though, all of that, that downturn in the market
for the X date and previous debt ceiling standoffs have retraced except for 11
when the market sold off for other reasons, that European debt crisis was
was front and center during that period of time of.