I\u2019ll review some of the key details of the deal below. But my main focus this week is to imprint on readers how the debt ceiling drama\u2014while causing much distress in the media and worry amongst everyday investors\u2014has consistently proven to be a \u201clooming catastrophe of global proportions\u201d that simply never comes to fruition. In the future, investors might be best suited to ignore these debt ceiling flare-ups altogether.2<\/sup><\/p>\n\n\n\n Some readers may note that while the U.S. will not miss any obligations or debt payments in this instance, there is still the possibility of a credit downgrade from one of the rating agencies like Fitch, Standard & Poor\u2019s, and\/or Moody\u2019s. That\u2019s possible, especially considering Fitch\u2019s recent press release indicating that the U.S. was on watch for a potential downgrade from its sterling AAA credit rating.<\/p>\n\n\n\n The question is whether a credit downgrade matters all that much.<\/p>\n\n\n\n For individuals, when your credit score goes down, it can have meaningful effects on whether you\u2019re extended credit and how much borrowed money costs \u2013 think about your mortgage rates, credit card interest rates, auto loan rates, etc.<\/p>\n\n\n\n For developed countries, however, a slight credit downgrade has historically been much less meaningful. The \u2018fiscal cliff\u2019 fiasco of 2011 offers a recent example. A major headline in that period was Standard & Poor\u2019s downgrading the U.S.\u2019s debt rating from AAA to AA+, which felt like a huge deal at the time. One would think that a debt downgrade would put upward pressure on the cost of borrowing, which in the case of the U.S., would mean higher yields on U.S. Treasuries.<\/p>\n\n\n\n But as the chart below shows, the opposite happened.<\/p>\n\n\n\n Yield on 10-Year U.S. Treasury Bond (2011)<\/strong><\/p>\n\n\n\n Source: Federal Reserve Bank of St. Louis3<\/sup><\/em><\/strong><\/p>\n\n\n\n When Standard & Poor\u2019s downgraded the U.S.\u2019s debt rating, yields on the 10-year U.S. Treasury bonds went down<\/em> \u2013 not up. In other words, the cost of borrowing got cheaper for the U.S. in the wake of the rating agency\u2019s wrist-slap.<\/p>\n\n\n\n The same has been true for other developed countries like Japan and the UK when rating agencies have issued downgrades. Yields did not uniformly go down in every case, but in the instances when yields rose, they did so by fairly marginal amounts. In short, downgrades have not had much impact on developed countries\u2019 ability to borrow.<\/p>\n\n\n\n It\u2019s also worth remembering that rating agencies arguably lack credibility in financial markets. Back in the spring of 2008, Fitch gave Lehman Brothers\u2019 preferred stock an A+ rating just a month after Bear Sterns failed. Lehman would go under just five months later. Fast forward to today, and Fitch says that the U.S. missing a debt payment is a \u201cvery low probability event,\u201d while at the same time warning of a possible downgrade. This stuff just isn\u2019t worth investors\u2019 time.<\/p>\n\n\n\n Bottom Line for Investors<\/strong><\/p>\n\n\n\n The deal on the debt ceiling would suspend the U.S.\u2019s borrowing limit for two years while cutting a few spending programs and increasing military spending by 3%. One concern of markets was that the deal would make significant cuts to government spending, which factors into GDP growth calculations. But those worries have largely been abated, as estimates say the deal would reduce federal spending by about 0.2% of GDP through 2025.<\/p>\n\n\n\n You read that last sentence correctly \u2013 all of the drama and hand-wringing over the debt ceiling for a marginal reduction in overall spending, which does not deviate meaningfully from baseline long-term forecasts. As I\u2019ve written before, I don\u2019t think the debt ceiling is worth investors\u2019 time. In a few weeks\u2019 time, no one will be talking about it anyway.<\/p>\n","protected":false},"excerpt":{"rendered":" After all the drama of the debt ceiling standoff, a deal appears to be imminent. Was it all much hand wringing over nothing?<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[181,1],"tags":[],"class_list":["post-9478","post","type-post","status-publish","format-standard","hentry","category-financial-professionals","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9478","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=9478"}],"version-history":[{"count":4,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9478\/revisions"}],"predecessor-version":[{"id":9485,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9478\/revisions\/9485"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=9478"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=9478"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=9478"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}![\"\"](\"https:\/\/zacksim.com\/financial-professionals-insights\/wp-content\/uploads\/2023\/06\/image-1024x350.png\")
<\/figure>\n\n\n\n