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Debt Ceiling Debate
Failure to reach a deal..."Would be a negative signal of the broader governance and willingness of the U.S. to honor its obligations in a timely fashion and would be unlikely to be consistent with a "AAA" rating" – Fitch rating agency.
As of this press time, there has been no resolution to the debt ceiling negotiations. This event has caused major disruptions in the financial markets, including a spike in interest rates over the last few weeks.
Adding to the uncertainty, the bond rating firm Fitch has put our debt on a negative rating watch. This is a direct threat that if we do not resolve the debt ceiling, a credit downgrade would result.
History Might Be On Our Side
Back in April 2011, our debt was put on negative watch by credit agencies and on August 5th, 2011, our debt was downgraded. What happened at that time? Rates improved.
After a week plus of rates edging higher, maybe this event will start the process of stabilization. If you look at the chart section below, you can see MBS prices were able to remain above support, which means rates stopped increasing.
The lack of resolution on the debt ceiling may be a reason why the Fed may very well pause on hiking rates in June.
Bottom line: As the debt ceiling debate continues unresolved, we should not expect much if any improvement in interest rates.
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