The never-ending, all-too-frustrating Debt Ceiling debate wages on and this has investors taking refuge in the safe haven of the Bond Market. Both Treasuries and Mortgage Bonds are benefiting, while Stocks are taking a big hit.
The Debt Ceiling is the legal limit on the total debt the U.S. can accrue – and there are two types of debt.
Public debt, which is debt the government borrows from investors by way of U.S. Treasuries – bonds and notes. The investor buys the Treasury bond or note and receives a fixed rate of return via the interest rate. The bond/note is ”guaranteed by the full faith and credit of the US” and is a debt the government must repay. Think of it like an IOU – the investor is holding an IOU from the U.S. government.
Government debt is debt it owes itself for things such as social security and medicare. The government collects those taxes and then has a choice what to do with that money – save it or spend it. If they spend it, they owe the entity the money. While this debt isn’t an immediate concern, it will be as time passes.
Congress controls federal spending and borrowing and uses the Treasury to carry out their directives. Thus the “printing of money” in the form of Treasury Bonds and Notes.
Once capped out by the debt ceiling – the preauthorized limit which has been set – the U.S. has no more borrowing authority. The printing press will stop.
Republicans want major cuts to entitlement programs as a condition of raising the debt ceiling and many are behind a balanced budget amendment which would hold Congress to the task in the future. Democrats agree that cuts are necessary but want tax hikes to bring in added revenue. Obama had asked for a clean vote – an increase of the debt ceiling with no strings attached. He is against a balanced budget amendment.
A deal will get done – it is just a matter of time. The question is “what will it look like?”
In times where there is high uncertainty and weak economic prospects, the US Bond Market – both Treasuries and Mortgage Bonds – will continue to be a safe haven, attracting funds and keeping home loan rates attractive.
