Chart of the Week

Sources: Bloomberg and Wells Fargo Investment Institute. Monthly data as of August 31, 2021. This chart was excerpted from the Institute Alert “Investment implications of a new debt ceiling debate” dated August 31, 2021.

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A two-year suspension of the debt ceiling ended on July 31, resetting the debt ceiling (orange line) at $28.5 trillion. The U.S. Treasury has kept the government funded with a drawdown of nearly $460 billion in Treasury cash balances and $350-$500 billion in savings from suspended rollovers of government pension-fund investments. Treasury Secretary Janet Yellen, in a letter released September 8, warned that these measures can keep the government funded only until October.

Failure to raise the debt ceiling could cause a government shutdown, and risk a debt default or suspended payments on government obligations. It is not yet clear how Congress will proceed, but a deepening divide between Republicans and Democrats, narrow Democratic majorities in both houses, and divisions between the progressive and moderate wings of the Democratic Party could make the debate noisy.

The unclear path for the debt ceiling poses a significant risk of market turbulence in what historically has been a volatile September and October. However, the budget showdowns and debt-ceiling debates of the past several decades demonstrate that both parties want to avoid political responsibility for a shutdown. We believe compromise is the most likely outcome, given the stakes involved in any miscalculation.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. High yield (junk) bonds have lower credit ratings and are subject to greater risk of default and greater principal risk.

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