The debt ceiling crisis has once again captured headlines, raising concerns about the potential consequences for the economy. As discussions intensify ahead of June 1st, it’s important to understand the likelihood of default and the difference between technical default and default. In this article, we will explore these concepts, shed light on the risks involved, and offer reassurance that no immediate portfolio action is required.
Default refers to the failure to fulfill financial obligations, such as interest or principal payments, by a borrower. It is a serious situation that can have far-reaching implications for both the borrower and the lending institutions. On the other hand, technical default refers to a temporary breach of terms, which could be the result of a missed payment that is made up within 30 days.
It is crucial to address concerns about default and technical default probabilities. As of today, the likelihood of default on U.S. government debt is less than 1%. The risk of the government failing to meet its financial obligations is extremely low. Similarly, the chances of technical default, which can occur due to short-term procedural disruptions, are estimated to be around 3%. While this remains a possibility, it is important to note that it does not indicate a fundamental inability to meet obligations or a long-term financial crisis.
In light of the debt ceiling crisis, it is essential to understand that you don’t need to take any immediate action or make hasty decisions regarding your portfolios. It’s important to stick to your long-term investing goals and allocation. US Treasuries are still the safest fixed income investment in the world.
Additionally, it is worth noting that the US Treasury has a perfect track record of meeting its financial obligations, and efforts are consistently made to resolve debt ceiling issues. Policymakers recognize the potential consequences of a default and typically work towards finding a solution. They do this because it would be political suicide to let a default occur – harming voters across the socio-economic spectrum and across all political parties.
As always – if the facts change, our advice will change. In the meantime, spend time on what you enjoy!
