Shutdowns and Showdowns at the O.K. Corral

The gunfight at the O.K. Corral was an infamous 30-second close range shootout between lawmen and outlaws that took place on October 26, 1881 in Tombstone, Arizona.

The incident left three outlaws dead. Arizona was then a territory and truly the Wild West! This shootout is generally regarded as the most famous gunfight in Western American history, and lives on in our collective memory due to a number of movies and books on the subject.

Like this famous gunfight, raising the debt ceiling and passing the U.S. budget will provide high drama, and even perhaps some political casualties. But in all likelihood, both pieces of legislation will eventually get passed.

Once Congress gets back to work in Washington on September 5th, the highest priority is raising the debt limit, the so-called the debt ceiling. The Congressional Budget Office (CBO) estimates the government will hit this ceiling by mid-October and then be unable to issue debt to pay its bills. Since the government spends more than it receives, raising the limit is important, as we can see in the following chart from the CBO. But as we have seen in other years, this drop-dead date can be extended through extraordinary measures, and nobody really wants to stop Social Security payments or default on the national debt.

The Federal budget should be passed by October 1st of each year, but this deadline is often postponed through a continuing resolution if there are enough votes. A short shutdown is a possibility, but the fast-approaching midterm elections make a shutdown less likely.

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Adding to the pressure to pass legislation, Fitch has threatened to put the U.S. on review for downgrade if the government cannot raise the debt ceiling in a timely manner. As you remember, S&P downgraded the U.S. to AA+ in 2011 due to concerns about federal debt levels and political divides.

The gunfight at the O.K. Corral did not end the lawlessness of the West, and the current budget and debt battles will not noticeably change the recent slow and steady growth of the U.S. or the course of the fixed income markets (absent some dislocations for U.S. Treasuries that mature in the next few months). Moderate growth, low inflation and generally stable fixed income markets are broad and deep trends not easily moved by a bit of drama and a few political causalities.

Source: Bloomberg, Reuters, The Financial Times, The Congressional Budget Office