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Chart of the Week

Weekly chart using economic data to address timely market topics from the Wells Fargo Investment Institute Global Investment Strategy team.

September 14, 2021

Gary Schlossberg, Global Strategist

Michelle Wan, CFA, Investment Strategy Analyst

Why investors should be wary of a debt-ceiling impasse

The chart shows the U.S. Treasury public debt outstanding since December 2015. Total debt outstanding grew from $19 trillion at the end of 2015 to $28.4 trillion in August 2021, kept by the current debt ceiling of $28.5 trillion.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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The increase in U.S. public debt outstanding since 2015 — including a pandemic spike in 2020

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.

What it may mean for investors

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.

Risks Considerations

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.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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