{"id":7616,"date":"2023-05-12T02:03:40","date_gmt":"2023-05-12T06:03:40","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/heres-where-investors-may-turn-to-hide-as-u-s-debt-ceiling-deadline-looms-based-on-2011-market-reaction\/"},"modified":"2023-05-12T02:03:41","modified_gmt":"2023-05-12T06:03:41","slug":"heres-where-investors-may-turn-to-hide-as-u-s-debt-ceiling-deadline-looms-based-on-2011-market-reaction","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=7616","title":{"rendered":"Here\u2019s where investors may turn to \u2018hide\u2019 as U.S. debt-ceiling deadline looms based on 2011 market reaction"},"content":{"rendered":"

Stocks risk slumping in the debt-ceiling showdown, but investors probably will still want long-term Treasurys if 2011\u2019s battle over the U.S. borrowing limit is any guide, according to Sevens Report Research.<\/p>\n

\u201cIf the debt ceiling is hit and the Treasury department can\u2019t sell additional Treasuries, it does not mean the U.S. is bankrupt or in default,\u201d said Tom Essaye, founder of Sevens Report Research, in a note Thursday. \u201cWhat it does mean, is that the Treasury department then has to \u2018ration\u2019 its existing cash and decide who to pay, and who not to pay.\u201d<\/p>\n

\n

In theory, \u201cTreasury could pay interest on existing Treasury debt, soldiers\u2019 salaries, social security, and not pay federal workers\u2019 salaries and federal contractors,\u201d he said.<\/p>\n

The U.S. is potentially just three weeks away from bumping up against its borrowing limit, which would prevent the Treasury Department from selling additional Treasury debt, according to the note. That\u2019s a problem because the U.S. government funds its day-to-day operations through regular sales of Treasurys, Essaye explained.<\/p>\n

With much of its analysis based on the debt-ceiling \u201cdrama\u201d in 2011, Sevens Report suggested the risk of hitting the debt ceiling might drive investors into long-term Treasurys.\u00a0<\/p>\n

\u201cLonger-dated Treasuries performed very well, and if there\u2019s a place to \u2018hide\u2019 during the debt ceiling drama, longer-dated Treasuries was it,\u201d Essaye said in the note. \u201cThis makes sense because regardless of what happens in the next three weeks, no one credibly thinks that interest payments won\u2019t be made on 10-year Treasury debt, nor that this short-term Washington fiasco will materially degrade the credit worthiness of the U.S.\u201d<\/p>\n

Read:<\/strong> Debt-ceiling standoff: Here\u2019s what could go into a bipartisan deal<\/p>\n

Also see:<\/strong> Debt-ceiling solution? The 14th Amendment, explained.<\/p>\n

Treasury Secretary Janet Yellen has warned the so-called X-date for the U.S. government hitting its debt ceiling may be as soon as June 1.\u00a0<\/p>\n

In 2011, the yield on the 10-year Treasury note fell in the runup to the U.S. coming up against its borrowing limit, according to the report. When investors pile into Treasurys, prices of the debt rise while yields fall.\u00a0<\/p>\n

\u201cThe 2011 debt ceiling drama really intensified in May 2011, and the 10-year yield was around 3.2%,\u201d Essaye wrote. \u201cBy the time the U.S. got to the eve of hitting the ceiling,\u201d or around late July and early August, the yield on the 10-year Treasury note had declined to 2.7%.<\/p>\n

In other words, \u201cthe 10-year Treasury rallied,\u201d he said.<\/p>\n

What\u2019s more, by the time the market bottomed in late October 2011, \u201cthe 10-year yield had dropped to 1.80%,\u201d according to the report.<\/p>\n

On Thursday, the yield on the 10-year Treasury note
\n TMUBMUSD10Y,
\n 3.382%<\/bg-quote>
\n fell 3.4 basis points to 3.396%, according to Dow Jones Market Data.<\/p>\n

While \u201chitting the debt ceiling doesn\u2019t mean the U.S. automatically defaults on its debt,\u201d said Essaye, \u201cit does mean it\u2019ll have to direct cash to essential services and payments and not pay \u2018less essential\u2019 services.\u201d The Treasury restricting payments could \u201ccreate a huge headwind for economic growth and make a hard landing more likely,\u201d he warned.<\/p>\n

Read: <\/strong>Stanley Druckenmiller warns of U.S. hard landing at Sohn conference, says debt-ceiling debate \u2018really depressing\u2019<\/p>\n

Still, some investors may be eyeing the debt-ceiling debate \u201calmost like a pothole in the road,\u201d according to Essaye.<\/p>\n

\u201cYes, if we hit the pothole, it can cause some damage and discomfort, but it won\u2019t derail the entire journey,\u201d he said. \u201cAnd bond investors are avoiding this pothole by selling one-month Treasuries
\n TMUBMUSD01M,
\n 5.506%<\/bg-quote>
\n hard,\u201d recently driving their yield to more than 5.5%, \u201cand buying longer-dated debt.\u201d<\/p>\n

Gold as a hedge?<\/h4>\n

During \u201cthe height of the debt ceiling drama\u201d in 2011 gold saw a strong rally, with SPDR Gold Shares
\n GLD,
\n -0.86%<\/bg-quote>
\n rising 20% from early May through mid-August, according to the report.<\/p>\n

But the yellow metal \u201cgave back those gains over the remainder of the year,\u201d Essaye cautioned.<\/p>\n

\u201cGold
\n GC00,
\n -0.23%<\/bg-quote>
\n did prove a useful hedge against debt ceiling uncertainty and likely will again this time,\u201d he wrote. \u201cBut remember,\u201d he said, \u201cit\u2019s a trade as a hedge, not a long-term hold\u201d for debt-ceiling protection.<\/p>\n

What about stocks?<\/h4>\n

As for the stock market, equities don\u2019t fare well following debt-ceiling \u201cdramas,\u201d even if the issue is finally \u201cresolved at the last minute,\u201d according to the report.\u00a0<\/p>\n

\u201cThe S&P 500 fell 6% from May through August 2011,\u201d said Essaye, which is when \u201cthe debt ceiling drama really intensified.\u201d And after a debt-ceiling extension, the index dropped another 15%, tumbling more than 20% from peak to trough from May until October, the report says.<\/p>\n

In 2011, defensive sectors, including utilities, consumer staples and healthcare, \u201chandily outperformed\u201d with double-digit gains, according to Sevens Report Research. But \u201cfinancials and materials both dropped sharply.\u201d<\/p>\n

Other analysts who have considered 2011 as a reference for how the latest debt-ceiling debate could shake out in markets have highlighted Europe\u2019s debt crisis at the time.<\/p>\n

For example, in a report earlier this week, CreditSights analysts warned that pressure risks building in the high-yield credit market due to the uncertainty surrounding the U.S. borrowing limit, drawing comparisons to 2011\u2019s debt-ceiling showdown. They said 2011\u2019s macroeconomic backdrop was challenging, as the U.S. was still recovering from the global financial crisis while Europe was grappling with weakness in its banking system and a sovereign-debt crisis.<\/p>\n

And in an interview earlier this week with MarketWatch\u2019s William Watts, David Lefkowitz, head of equities for the Americas at UBS Global Wealth Management, said that in the stock-market\u2019s sharp selloff in 2011 it\u2019s hard to \u201cdisentangle\u201d debt-limit fears and the Eurozone\u2019s debt crisis.<\/p>\n

See:<\/strong> Will stock-market investors panic as debt-ceiling standoff intensifies? Here\u2019s what to watch.<\/p>\n

U.S. stocks were trading lower Thursday afternoon, as investors digested fresh data showing that wholesale inflation rose in April slightly less than expected as well as a report from the Labor Department saying initial jobless claims in the week ended May 6 rose to the highest level since October 2021. Still, the U.S. unemployment rate remains historically low, at 3.4% in April.<\/p>\n

The Dow Jones Industrial Average
\n DJIA,
\n -0.66%<\/bg-quote>
\n was down 0.8% Thursday afternoon, while the S&P 500
\n SPX,
\n -0.17%<\/bg-quote>
\n fell 0.3% and the Nasdaq Composite
\n COMP,
\n +0.18%<\/bg-quote>
\n edged up 0.1%, according to FactSet data, at last check.<\/p>\n<\/p><\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Stocks risk slumping in the debt-ceiling showdown, but investors probably will still want long-term Treasurys if 2011\u2019s battle over the U.S. borrowing limit is any guide, according to Sevens Report Research. \u201cIf the debt ceiling is hit and the Treasury department can\u2019t sell additional Treasuries, it does not mean the U.S. is bankrupt or in […]<\/p>\n","protected":false},"author":1,"featured_media":7617,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-7616","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-markets","tag-featured","post_format-post-format-gallery"],"yoast_head":"\nHere\u2019s where investors may turn to \u2018hide\u2019 as U.S. debt-ceiling deadline looms based on 2011 market reaction | iFintechWorld<\/title>\n<meta name=\"description\" content=\"Stocks risk slumping in the debt-ceiling showdown, 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