To avoid the risk of a downgrade for the world’s largest economy, Fitch Ratings warned Wednesday night that the US government needs to raise the debt ceiling. Treasury Secretary Janet Yellen had previously stated that Thursday, June 1, is the deadline for the government to take action. However, with the X-date rapidly approaching and still no agreement reached to raise the debt ceiling, the financial well-being of Americans is in jeopardy.
The failure to increase the debt limit, which determines the amount the US government can borrow to meet its financial obligations, could have far-reaching consequences for various aspects of American life. It could impact mortgage rates, paychecks for federal employees, and many other financial matters.
House Majority Leader Steve Scalise announced that the House would go on recess after the Thursday votes while negotiators continue their efforts to reach a debt ceiling deal. However, Speaker Kevin McCarthy urged lawmakers to remain available over the Memorial Day weekend.
In light of the potential for a US default, Americans need to prepare and protect their financial well-being if the debt limit is not raised. Here are some measures to consider:
1. Expect bond market volatility:
Bond investors should anticipate volatility, even during negotiation. While US Treasuries are considered the safest assets globally due to the backing of the United States’ full faith and credit, the uncertainty surrounding the debt ceiling deal introduces additional risk. The primary concern for bond investors is when they will receive repayment rather than if they will receive it.
2. Monitor bond maturity dates:
Consider the maturity dates if you invest in Treasury bills. For those who hold Treasury bills maturing on or shortly after June 1 and require the funds, it may be advisable to sell those bills now and reinvest what you don’t use. During an interview with CNN, Collin Martin, who serves as the director and fixed-income strategist at the Schwab Center for Financial Research, recommended this course of action.
3. Focus on high-quality investments:
Avoiding corporate junk bonds or emerging market bonds is recommended. In the event of a US default, high-risk debt instruments will face significant pressure. Maintaining the confidence of the market is crucial when borrowing money.
4. Review and adjust your investment portfolio:
Evaluate your equity-to-bond allocation and make necessary adjustments, especially considering the approaching deadline. Stocks, being riskier than bonds, are likely to become more volatile as the deadline approaches.
5. Prepare for market reactions:
Moody’s Analytics forecasts that, despite the possibility of reaching an agreement, there is a potential for stocks to experience a decline of up to one-third of their value, erasing $12 trillion in household debt. While a relief rally is expected once the default issue is resolved, there might be an immediate correction period as the Treasury replenishes its depleted cash reserves.
6. Exercise caution for short-term investments:
Short-term investors should be particularly cautious during this period of uncertainty.
7. Plan for military families:
Military families should ensure they have extra funds and fully topped-off emergency funds to manage any missed paychecks. Reviewing the budget and identifying areas where temporary cutbacks can be made is advisable. Additionally, military service organizations and certain banks specializing in serving military personnel may provide temporary loans in case of emergencies.
8. Create an emergency stockpile for veterans:
Those receiving veterans benefits should prepare an emergency stockpile due to the potential impact of a default on disability payments and pensions, particularly affecting low-income veterans and their surviving families.
In these uncertain times, staying informed is crucial, as maintaining a balanced portfolio aligned with your financial goals and remaining disciplined. Taking a long-term view is especially important during periods of financial uncertainty.
