The stock market has not reacted much to the deadlocked discussions regarding the looming debt ceiling deadline, but experts said volatility is likely to rise.
All three stock indexes were down on Wednesday following Tuesday’s drops. On Tuesday the Nasdaq saw the largest decline with a 1.26 percent drop while the S&P 500 fell by 1.12 percent and the Dow reported the smallest drop with 0.69 percent.
The bipartisan talks ended on Tuesday with no resolution between congressional Republicans and U.S. President Joe Biden. A deal needs to be reached before June 1 to increase the government’s $31.4 trillion borrowing limit or the U.S. risks defaulting. Yields on the one-month Treasury bills reached record highs of 5.88 percent as concerns increase.
Some economists have said the deadline is June 10 while US Treasury Secretary Janet Yellen has stuck to a June 1 deadline. But as the deadline gets closer, the stock market will likely be volatile, said Kristina Hooper, chief global market strategist at Invesco on March 23.
“Late last week, the stock market moved from complacency to fervor around the debt ceiling situation – reports that the parties were getting closer to an agreement sent stocks higher,” she said.
While the stock market has not reacted very much to the debt ceiling talks, the bond market is showing more signs of strain and concern that a compromise will not be reached in time. The bond market is “pricing in the risk of a technical default with yields on T-bills maturing in early June rising dramatically,” Hooper said.
Investors in the stock market remain more optimistic and do not appear to have priced in the risk, she said. While the stock market tends to be more optimistic than the bond market, investors there have the “more accurate measure of risk right now and that a brief technical default is a real possibility,” Hooper said.
A technical default would not last long. “I just believe a technical default would likely be very brief, as it would provide the impetus for the parties to finally reach an agreement and end the standoff,” she said.
Jamie Dimon, CEO of JPMorgan Chase (JPM), predicts more market instability before a deal is reached. He believes the likelihood is that the U.S. government “will not” default, he said on May 17. But he laid the odds at “probably.”
Dimon, Citigroup (C) Inc. CEO Jane Fraser, and other banking executives met with Senate Majority Leader Chuck Schumer.
“The US should not and probably will not default,” Dimon said after the meeting. But he said JPMorgan Chase created a war room in case a default occurs. “Whatever it is, we will be prepared,” he said.
The lack of an agreement by the deadline would increase volatility in the stock market, Dimon said on May 11.
“The closer you get to it, you will have panic,” he said of the impact on the market and Treasurys.
A default would sink stock market valuations, impacting retirement portfolios in the short term and delaying Social Security payments to the 66 million retirees, disabled Americans, and children who receive the Security benefits.