Debt ceiling strategy

[Freedom56]

Your debt ceiling strategy should be to keep some "dry powder" ready for buying opportunities. The market will create drama but in the end the debt ceiling will be raised. However, unless there is a serious move to balance the budget at some point in the future, there will be a debt downgrade of treasury notes/bonds which will cause a spike in yields.

[mpeirce]

Quote:

Originally Posted by Beststash IMO, the debt ceiling statute should be abolished. It serves no useful purpose and only serves as a political weapon. This issue is NONPARTISAN.

Of course it serves a useful purpose and you said it. It’s a political weapon. And it is also non-partisan as you said as it’s used by both sides in turn.

It even serves another more useful purpose, which is to focus attention on the growth of the debt each time it comes around.

As to the question should “we” be doing something concerning investing because of it. That’s simple too: nope.

[jebmke]

I'm not doing anything different

[Sojourner]

I'm not changing my asset allocation at all, since I can't know in advance how this will play out. Also, the majority of my investments are not in tax-advantaged accounts, so I can't change my AA in a meaningful way without triggering lots of capital gains.

What I might very well do is shift my options selling strategy for the puts I'll be selling later this month with June expirations. I may be more conservative this month with strike prices, thinking that a BIG drop in equities is more likely in the June time frame. This would result in smaller premiums (i.e. less income from selling puts), but that's fine. Given the uncertainty, I'd prefer to err on the side of caution in this particular case.

[donheff]

Ironically, probably the safest place to be if they do go over the cliff would be the TSP G Fund. You wouldn't make money for a while but you can't lose principle. And, as concerned as I am, I rest assured that we will ultimately honor our obligations so the TSP folks have safe cash.

What about money markets and CDs. If we have an huge mess in the financial markets do those likely survive? If not, I may as well stay in equities. My biggest worry there is that if things blow up as badly as the eggheads predict, we could face a long recovery.

As to my pessimism, it is just the nature of the debt ceiling. We have created a bipartisan nuke that will explode absent a bipartisan agreement in times like the present with split chambers. But, unlike the normal budget process, it isn't a slow process with minor early impacts that slowly ramp up to real pressure forcing compromise. We have seen that budget process unfold numerous times > continuing resolutions working up to agreement > occasionally someone calls the other side's bluff and we go into a shutdown. But the law governing shutdowns limits the fallout. Some people get hurt but most are not even aware of the impacts as long as the Treasury can keep issuing treasuries. The problems build up slowly and eventually the pressure is enough to force compromise.

The debt ceiling, on the other hand, blows up on a day certain and stops the checks entirely (or close). So there is no slow ramp up of consequences to push resolution. If Congress slips up the problem blows up. Or so the economists say. And I think I can safely say, without provoking Porkie, that I have never seen a worse political environment for compromise. I really worry they will hold tight too long.

Historians will point out that before our life times there were worse political situations. So that is some consolation.

[steelyman]

I’m not changing anything either. It would be hard to repeat my poor portfolio performance in 2022 so no tinkering, just stay in the saddle.

[gromit]

This just posted to my Twitter feed, from NBC News - "BREAKING: Treasury Sec. Janet Yellen warns that the U.S may reach its debt limit by June 1 — exactly one month from today."

[Lsbcal]

History is on the side of "do nothing".

I don't know what the short term effect on equities would look like. My TIPS would probably not be affected (in my long term view) since they are positioned to hold to maturity. My Federal MM fund would probably not be affected. Whatever happens would probably be over in a few weeks as far as checks and cash go ... my wild guesses.

[Sunset]

I can't really think what I would do different.
I would guess actual defaults by the gov't to pay debts will besides jumping interest rates for borrowing, cause a sudden drastic devaluation in the US dollar.

So all my US investments are at risk.
I have a small amount in another country, so we could eat for a few years.....

So can't really do much, but wait a few months.

[Dreamer]

Quote:

Originally Posted by Beststash IMO, the debt ceiling statute should be abolished. It serves no useful purpose and only serves as a political weapon. This issue is NONPARTISAN. Just some more old legislation that once enacted never ever goes away. We have enough issues without adding more that is totally meaningless.

+1000

If they did default, when the debt limit was passed again, wouldn't they go back and pay the interest that they missed on treasuries?

[DAYDREAMER]

Dumb question. Why would default be such a sudden catastrophic event? Does money suddenly disappear? Who loses money, and how?

[Zathras]

Quote:

Originally Posted by DAYDREAMER Dumb question. Why would default be such a sudden catastrophic event? Does money suddenly disappear? Who loses money, and how?

Essentially, yes.
Right now, the USD is viewed as incredibly safe. Our debt is held by many citizens, foreign citizens and countries.
If the US defaulted on its debt, those bonds would require a larger interest rate. This would essentially mean the gov. Has less money for other things.

Investments in the US may slow down (depending upon how long we keep defaulting).

The debt is something to be concerned about. But the time for our representatives to debate it, is when the budget is made and the money spent. Not when the bills come due.

I agree with the others that the debt ceiling should be abolished.

[Tadpole]

Quote:

Originally Posted by DAYDREAMER Dumb question. Why would default be such a sudden catastrophic event? Does money suddenly disappear? Who loses money, and how?

No, I am so dumb your question seems smart in comparison. I thought that only an amendment rescinding an existing amendment to the US Constitution could override the Constitution. But we have this debt ceiling thing that says we can just not pay our bills. But the Constitution, Fourteenth Amendment, says that if we have already incurred the debt, that existing debt is not in question.

Quote:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

So, insofar as existing debt is concerned, how can it just not be paid even without new spending? Debt service seems to me to be pre-obligated by the Constitution. Additionally, what keeps tax and other revenue from being collected and new securities from being sold? Neither is new spending.
See how confused/dumb I am. Your question is way above all mine.

[RxMan]

The debt ceiling means nothing when you perpetually overspend.

[jldavid47]

Quote:

Originally Posted by Car-Guy Me too... There's nothing I can do anyway except diversify.

No, you can use index options to hedge.

[Katsmeow]

So the date has been announced as early June, possibly June 1. Could change and be later with greater tax receipts than anticipated. My Treasury Bills mature in late May. Will probably wait and see to reinvest the.

Quote:

Originally Posted by DAYDREAMER Dumb question. Why would default be such a sudden catastrophic event? Does money suddenly disappear? Who loses money, and how?

If the US defaults on its obligations such as not paying on bonds and treasury bills and other bills it will hurt the US global credit rating. The US will have to give higher rates for people to take out their loans. If my treasury bill, for example, was going to mature after the debt ceiling caused a default I would be pretty sore not to get back the money that I loaned to the government. Might make me not want to loan any more.

[Free bird]

Quote:

Originally Posted by COcheesehead I listened to an interview with one Congressman. In summary here is what he said. We are willing to negotiate, but we are not giving anything up. LOL

Okay let’s negotiate….you go first

[Lsbcal]

As the OP indicated this is about our investment response to the current concern about government default.

THIS IS NOT ABOUT WHAT SHOULD BE DONE BY POLITICIANS IN THE FUTURE.

[Montecfo]

Quote:

Originally Posted by Katsmeow So the date has been announced as early June, possibly June 1. Could change and be later with greater tax receipts than anticipated. My Treasury Bills mature in late May. Will probably wait and see to reinvest the. If the US defaults on its obligations such as not paying on bonds and treasury bills and other bills it will hurt the US global credit rating. The US will have to give higher rates for people to take out their loans. If my treasury bill, for example, was going to mature after the debt ceiling caused a default I would be pretty sore not to get back the money that I loaned to the government. Might make me not want to loan any more.

I'm not sure about all that. Even if we default, which would be ill advised, we would quickly raise the debt ceiling and pay obligations.

Not sure there would be an investible event with respect to bonds.

People would recognize it for what it is. And if you notice, even after the debt downgrade Treasury bonds are still bought in ever higher numbers and at low rates. Did the debt downgrade "cost" us?

The 1.5T deficits as far as the eye can may be a more serious threat.

Still a bad plan but in this age, there are few brakes on government spending.

I have some cash on the sidelines from recent profit taking. My strategy would be to redeploy it on any significant selloff. If the debt ceiling struggle provides that, I will take advantage.

But hopefully sanity prevails.

[jazz4cash]

I’ll stick to the strategy question to avoid the “how we got here potholes”. I feel that even if it is different this time markets will recover in 3-5 yrs which is before my FI ladder matures. I am leaning towards buying equities but generally maintaining 70/30