The US government is unlikely to default on its debt, but the political stand-off will lead to higher volatility for both bond and equity investors, according to Robert Gahagan, senior portfolio manager at American Century Investments.
Policymakers in the US recently agreed to extend the country’s borrowing until December 2021, but after that are deadlocked on the future US budget, and without an approved budget, borrowing cannot happen.
In such a situation the Federal government would run out of cash, leaving employees unpaid.
Gahagan says he believes the problem will ultimately be resolved and a default on debt will not happen, but that investors are in for a bumpy ride until then.
He says: “We expect volatility in the stock and bond markets while negotiations play out, and we note the shifting economic backdrop. After spiking to its highest level in 13 years, nearly everyone is feeling the impacts of inflation.
"High demand, supply chain disruptions and rising costs for housing and labor are among the persistent factors causing prices to rise. We think inflation will remain elevated compared with recent years.
"We’ve also seen the yield on the 10-year Treasury note continue its steady climb off pandemic lows. We expect it to stabilise between 1.75 per cent to 2 per cent this year.”