What investors are telling clients about debt ceiling

This note just came through from an investment advisor I’ve worked with for years. This is what he’s telling clients, and I mostly agree except for “relative calm” in bond markets. The daily swings in MBS trading this week have been giant. But volatility aside, rates are about net even on the week so far:

While this political wrangling that is happening in Washington has caused unnecessary heartache, I have full confidence that an agreement will be made before the government defaults on its debt obligations. Why do I have such conviction? It’s certainly not my faith in our elected leaders to do the right thing for the country, but rather that they will do the right thing for themselves. It would not serve either side well in next year’s elections if they do not get this resolved expeditiously. Whether it’s just politics as usual or maybe just human nature, these issues typically only get resolved at the last minute before a deadline and I fully expect cooler heads to prevail this time as well.

What would happen if the August 2nd deadline to raise the debt ceiling passes without a deal done? Actually nothing, as the Federal government has plenty of money to pay on its debt for at least the month of August. One only has to look at the relative calm in the bond markets to see that investor concerns of a default are muted at best. Eventually they will have to increase the debt ceiling, but it does not have to be done by early next week, although the sooner the better. The greatest risk is headline risk, as the media continues to make this front page news, often with a lot of misinformation. My advice is to stay disciplined with our stop losses when breeched, but not to panic if we have a couple more down days like we did yesterday. I would expect any correction to be short lived and could prove to be excellent buying opportunities.