Expert insight
Possible debt ceiling outcomes, implications for investors
May 27, 2023
As negotiations over the debt limit continue between Congress and the White House, Vanguard Chief Investment Officer Greg Davis describes the potential paths ahead, including the likelihood of a positive outcome.
In this brief audiocast, Davis says that Vanguard believes it’s likely there will be a positive outcome, whether that means a short-term suspension of the debt limit or an agreement to raise it before the deadline in early June. Regardless of any short-term disruptions or volatility, Vanguard’s enduring message to investors is that they should stay focused and maintain a long-term perspective.
Read the transcript
Greg Davis: What our team has been going through and trying to handicap the likelihood of a positive outcome, they have it at about 95%.
Now, that positive outcome could come in one of two ways. One, you could get a short-term suspension of the debt limit, meaning they just kick the can down the road for a period of months and allows them to continue to negotiate over time. The other scenario is that they actually reach an agreement and raise the debt ceiling.
We have those probabilities combined at 95%. The other 5% is that there's not a resolution, and that we would have a problem.
The big problem would be, and we have this at less than 1%, the big problem would be that the government no longer pays principal in interest on the bonds that are outstanding, which would be quite problematic. The other possibility is the fact that they could make the payments on the bonds, the coupons and the principal payments, but not pay folks who would do Social Security, pension benefits, things of that nature.
So again, we think that's a low probability event. It's not a zero-probability event. We'd love it to be zero. The thing that we always try to say to investors is that you're focused on your retirement, you're focused on ten years, 20 years, 30 years down the line, whatever disruption we might see today, next week, a month from now, it’s going to be short lived, most likely. It will get resolved one way or the other. There will be increased volatility as we get closer to this date, but we do think it'll get resolved and we'll keep on plugging along and be driven by pure economics of what's going on in terms of the economy, inflation, corporate earnings, and things of that nature.
Related links:
- Vanguard leaders on the possibility of a U.S. debt default (audiocast, published May 2023)
- A measured response to the debt ceiling talks (article, published May 2023)
- What investors should know about the debt ceiling (article, published May 2023)
Notes:
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