Investors may feel concerned about the debt ceiling, as it could potentially lead to a government shutdown or default on U.S. government debt. If the debt ceiling is not raised in time, the government may not have enough money to pay its bills, including interest on its debt. This could lead to a downgrade in the country's credit rating, which could cause interest rates to rise and the economy to slow down.
However, historically, the debt ceiling has been raised whenever necessary, although sometimes after protracted political wrangling. So, while the debt ceiling could create uncertainty and market volatility in the short term, it is unlikely to lead to a long-term financial disaster.
It's also important to note that the debt ceiling is not directly tied to the country's overall debt level. Raising the debt ceiling does not increase the amount of debt the country has incurred; it merely allows the government to pay its bills on time.
The usual process is that the Republicans & Democrats use the debt ceiling to push their own agendas. Right now the ceiling is £13trn and should the ceiling to be raised, meaning Government are unable to pay its bills (default) - this would lead to catastrophic economic consequences.
The current date has been set to early June. However, today's meeting has been postponed until next week. Rumours are that talks are progressing well.
Nonetheless, what happens when we reach early June and there is not enough money?
Well, the Treasury takes extraordinary precautions to keep on servicing their debt, but the government might be shutdown.
In fact, that has happened before, and can create quite a lot of volatility for financial markets.
Not because anyone thinks the US will default on their debt, but simply because of hedging.
What is exactly meant by that?
Hedging is a trading term used to manage your downside risk to macro economic events. To protect your capital investors / instituions hedge (trade on the opposite side to the current risk), which means a neutral trade or the risk has been mitigated to a minimum.
To sum it all up, should investors fear the debt ceiling?
Based on historical events, the answer is no. One thing we do know is that there will be uncertainty leading up to the event, creating volatiltity in the markets.