Washington averted an imminent fiscal crisis, but the result could be a steep fiscal cliff in December or early 2018. We see heightened political uncertainty toward year-end as the U.S. Congress must revisit lifting the federal borrowing limit and funding the government. We could see this delaying and reducing the scope of any tax reform.
Last week’s deal raises the statutory debt ceiling and funds the government through December 15, taking the risk of a technical default off the table for now. We see short-term U.S. Treasury debt as a key barometer of this risk, as the chart below shows. Yields on Treasury bills maturing soon after the original late-September deadline fell as these T-bills were no longer seen as most vulnerable to default, while rates on T-bills maturing after the new December deadline rose.
It was a natural disaster that spurred politicians into action last week. The debt ceiling and funding plan is packaged with provisions to provide hurricane relief as authorities in Texas and Louisiana assess the devastation and tragic toll caused by Hurricane Harvey. This came just as Florida was bracing for the impact of Hurricane Irma. A government shutdown, the likely outcome of failure to pass a 2018 budget, would have been detrimental at a time when states are looking to the federal government for much-needed assistance.
The upshot is a likely fiscal cliff toward year-end as lawmakers again confront the debt limit and government funding—without the face-saving element of disaster relief. They also face a range of other thorny issues, including addressing residency rights for children who entered the country illegally and the controversial funding of a wall on the border with Mexico. Adding to the political storm: President Donald Trump sided with Democrats last week on the deal, despite Republican calls for a much longer extension of the debt ceiling and budget. This could make the fiscal debate harder the next time around. It could also complicate and delay tax cuts or reform, already a casualty of a busy legislative calendar.
Political risk has quieted for the moment, but we expect higher uncertainty as December 15 approaches. We see T-bills as a useful gauge for potential market anxiety. We favor equity and fixed income segments tied to the sustained global economic expansion, and advocate some allocation to long-dated government bonds as a buffer against equity market selloffs. Read more market insights in my Weekly commentary.
Listen to Richard Turnill and Jeff Rosenberg talk about BlackRock’s midyear investment outlook on the inaugural episode of our podcast, The Bid.
Investing involves risks, including possible loss of principal.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of September 2017 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.