The Debt-Ceiling Deal: Will a Default Be Averted?

Tim Clift

Chief Investment Officer

Over the weekend, President Biden and House Speaker McCarthy struck a deal on the debt limit. This is good news and it dramatically improves the odds that a U.S. default will not occur. We are not out of the woods yet, though, as the deal needs to be approved by the House and Senate. The House is expected to vote on the proposed bill later today. Passage in the House will send the bill to the Senate for a vote, and the debt-ceiling debacle could be resolved by the end of the week if all goes well.

If approved, the latest version of the bill suspends the debt ceiling rather than raising it and will allow the federal government to borrow money until 2025, well past the next presidential election. The bill is a compromise that includes:

• Limits on overall spending but not on defense
• Returning unspent COVID-19 relief funds
• Adding stricter work requirements for government food and healthcare programs
• New rules to make it easier for energy projects to get approved

Party leaders believe they have the votes to get the bill passed, but that doesn’t mean a resolution will necessarily come immediately and without drama and market volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in..

We’re prepared for any outcome in terms of how we are managing your investments and planning for your financial future.

As these events unfold over the next few days, we continue to believe a U.S. default is highly unlikely. Still, we think it is prudent to evaluate and prepare for any worst-case scenario and continue to look for ways to manage potential risksThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline.. For example:

• We have done a deep dive on the stability of the money market funds where our clients are invested to ensure there is ample liquidityThe ease with which an asset can be bought or sold. Assets for which there are many buyers and sellers at any given time are highly liquid (for example, a stock which trades on a public exchange). Assets which trade rarely are illiquid (for example, a Picasso painting or a high-end home). available in times of market stress
• We have our stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. and bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. portfolios currently positioned more defensively, as we see current downside risks as greater than upside
• DiversificationA strategy for managing investment risk by investing in a mixture of different investments. Since different asset classes face different risks, even if one type of asset declines in value, others may not. remains a foundational belief and our portfolios are well allocated across asset classes and market segments to help smooth the ride

As always, thank you for the trustA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process. you’ve placed in us. Please call your wealth advisor if you are worried about the debt-ceiling proceedings or have any other questions or concerns.