Despite the downgrade, demand for intermediate and longer-term Treasuries actually picked up during the market volatility, pushing yields lower, as Treasuries are generally considered a “safe haven” asset. While that may have been the market reaction in 2011, there is no guarantee that, in the event of a technical default and further rating downgrades, Treasury securities would have a positive return this time around—particularly if Treasury securities lose their reputation as bonds that have no default risk.
Conclusion
Given the experience from 2011, we think it was prudent for Congress to raise the debt ceiling reasonably in advance of the October 18 deadline when the government would likely no longer be able to meet all its obligations. Political brinksmanship with the debt ceiling is a dangerous game, with likely relatively little to gain and much to lose. Despite the extension, the legislative agenda for the fourth quarter remains packed, we may run into the same problem again in December, and both parties are similarly motivated. But the extra time does mean there is an easier path to addressing the debt ceiling through the budget reconciliation process if Democrats choose to use it. For now, the relief from even the unlikely possibility of a debt-ceiling crisis is welcome and markets are justifiably reassured.
Barry Gilbert is an asset allocation strategist and Lawrence Gillum is a fixed income strategist at LPL Financial.