Markets Look for Debt-Ceiling BreakthroughMarketsLookforDebt-CeilingBreakthrough

As the debt-ceiling deadline approaches, politicians in Washington are holding high-stakes negotiations that could have broad implications for financial markets as talks go down to the wire. Previous standoffs over the debt ceiling, including one in 2011 that also pushed up against the deadline, ended without the US failing to make interest payments. However, given the heightened risk of default, these impasses have a history of fueling market volatility. The latest round of congressional wrangling has been no different. The CBOE’s Volatility Index, a gauge of expected price swings in US equities, has climbed in the days leading up to the deadline. The Treasury market has been pricing in some downside risk ahead of the so-called X date, driving up yields for short-term bills that are due to mature soon after June 1. The US could default on its debt as early as June 1 if Congress does not raise the debt ceiling, according to the Treasury Department.

A default would upend the market for US government bonds—a linchpin of global financial markets—and threaten to set off a ripple effect knocking a range of other asset prices. The short-term outlook hinges on a resolution in Washington, where leaders from both chambers of Congress and President Joe Biden entered formal negotiations at the White House last week and met again on Tuesday. The House has passed Republican-backed legislation that would raise the debt ceiling and implement measures aimed at reining in federal spending, while Democrats have sought a debt-limit increase without concessions. Before embarking on an abbreviated trip overseas on Wednesday, Biden said he was “confident” in reaching an agreement and avoiding a default. PGIM experts analyze the state of negotiations between both parties, the potential outcomes in the debt-ceiling standoff, and the implications for investors.