Famous Ceilings in History

When it comes to famous ceilings, the US government’s debt limit is right up there with the Sistine Chapel. The debt ceiling represents the maximum amount that the government can borrow such that it can continue payments to its commitments, like social security, salaries for federal employees, and the servicing of debt. It works like an allowance that permits the US Treasury to take on new debt without obtaining congressional approval on individual debt issues.

While the debt ceiling is attracting attention in the media, the implications for fixed income investors are less clear: the debt ceiling is just one of many factors taken into consideration by bond markets. In the debt ceiling crisis of 2011, US Treasury yields actually declined during the period surrounding the culmination of this predicament in August, despite S&P downgrading the US sovereign debt rating from AAA to AA+.¹ This outcome highlights the challenges in attempting to outguess market prices. Making investment choices centered around policy decisions related to the debt ceiling might leave you staring at the floor.