Democrats took control of both chambers of Congress in Tuesday's midterm elections, and investors are now weighing the risk of a standoff over the government's borrowing limit. The government is unlikely to hit the cap until late next year, but political brinkmanship has the potential to unsettle markets.
Investors are focused on the risk of debt-ceiling standoffs after Democrats wrested the Senate and House of Representatives from President Donald Trump's Republican Party. Previous fights over the cap have led to down-to-the-wire showdowns, as lawmakers use it as leverage over fiscal policy.
Default unlikely, but markets may worry
The government is unlikely to hit the debt ceiling until late next year, but Democrats could wield the so-called X-date in negotiations with Republicans. Failure to raise the cap would threaten the Treasury's ability to pay the government's debts.
According to Michael Reynolds, vice president of investment strategy at Glenmede, a default scenario is "very unlikely". He added that the further lawmakers go down the brinksmanship path, the more worried markets are going to be.
December 11 funding deadline in focus
In the near term, analysts are zeroing in on December 11, the date by which Congress needs to agree on funding the federal government. Republicans could use that deadline to raise the debt ceiling before the new Congress takes office in early January, but some analysts were skeptical that would happen.
If Congress does not act before year-end, BMO rates strategist Vail Hartman said in a note that markets could face a protracted standoff in 2027, raising the risk of sovereign debt downgrades and increased volatility in cash and repo markets.
UBS, Moody's and BlackRock on the fiscal path
UBS analysts said Democrats could seek changes to Medicaid, housing incentives and other domestic priorities in exchange for their votes, and that an agreement might leave deficits wider than the Congressional Budget Office baseline. Other analysts said Democrats could check Trump's spending or tax-cut aims.
Moody's said the broader US fiscal trajectory was unlikely to change materially, because mandatory spending, demographic pressures and interest costs remain in place. The BlackRock Investment Institute agreed, but said in a note that divided government raises the risk of funding standoffs and government shutdowns.
Source: Reuters via Investing.com
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