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A Pending Rancorous Debate Over Debt Ceiling Causes Market Volatility




The markets in general and hedge fund managers, in particular, are often the first to respond to shaky politics and subsequent uncertainty. That’s just what is happening here as the pending debt ceiling debate between republicans and democrats, who must come together with Republicans and agree on a budget, is causing major market volatility.

The upcoming debt ceiling debate has hedge fund managers scrambling to cash in their chips and move to safer markets. The fear isn’t entirely irrational since 2011 saw an outwardly principled set of Republicans standing off with President Obama over raising the debt ceiling or the upper limit to the amount that the federal government can borrow. Refusal among Republicans to raise the debt ceiling leads to roiling markets and an actual credit downgrade of the United States itself by international regulatory bodies like Moody’s.

The stock market plummeted and fall by about a sixth during 2011 as Republicans and Obama duked it out over the debt ceiling. Today’s hedge fund managers worry that a credit downgrade and market volatility could imperil their (and their clients’) investments. Again, the fear isn’t entirely irrational. The deadline to raise the debt limit is at the end of this month (September 29th) and some Republicans are preparing to really dig in their heels this time around.

In a strange turn of events, though, the recent devastation caused by Hurricane Harvey along the Texas coast could auger something of a silver lining. Financial experts are banking on the fact that a bipartisan relief bill with appropriated funds is down the pike. These same experts expect that democrats and republicans will find a way to parlay that gesture into an overarching, larger motion that finds a way to raise the debt ceiling without enraging constituents back home.

Still, other hedge fund managers are cagey about the possibility of both sides coming together no matter how broadly palatable doing so would be for the country and markets. The rhetoric, some feel, is simply too fever pitched at the moment to allow cooler heads the chance to prevail. The U.S. Secretary of the Treasury, Steve Mnuchin, interestingly, left open the possibility of parlaying a relief bill into an action to raise the debt ceiling.

Hedge fund managers hardly know what to make of this level of ambivalence and disagreement. Many are preparing to sell off and hedge by buying lower-yielding U.S. Treasury bonds.

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