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TSP Talk Weekly Wrap Up - The Market's Tangle with The Debt-Ceiling

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Debt-ceiling negotiations are making the market nervous.
Members within Congress and the President are in a game of chicken, each with the goal of raising the debt-ceiling but neither on board for the others' plan to get there. The market is starting to pay more attention with the shot clock running out of time. Thrift Savings Plan fund prices have been stuck in a trading range for weeks that continues to shrink tighter. No TSP fund moved more than 1% in either direction in a single day this week, and all weekly losses were less than -1.0%:

Janet Yellen warned us that the Treasury may run out of money as soon June 1st if the debt-ceiling is not raised. This deadline should inspire initiative by lawmakers and the leaders of our country, but it is mostly making the market nervous. A meeting between the head constituents was reported to get somewhere between nowhere and elsewhere on Tuesday, and a meeting planned for Friday was postponed until early next week.

The economy appears to be holding up, but the ice is thinning. A failure to pay the country's debt w
ould lead to a global wide disruption in markets. U.S. Treasury yields are the benchmark yields across every kind of debt in the world, the center of the global economic universe. Interest rates would shift higher globally in the event of a U.S. Treasury bond default. We already have a Federal Reserve that has been pushing borrowing costs higher for more than a year. The combination would push the cost of debt to absurd levels, curtail demand, and certainly drive the economy into a recession.

The bulls and bears are equals until this threat is resolved. The market can't price in a potentially catastrophic event that can still be prevented. Even if lawmakers cannot come to an agreement, they'll likely look for loopholes to get around the worst. The government might be able to kick the can further down the road. This was mentioned in the Wall Street Journal:

"If the government can get through the first two weeks of June without missing a payment, it could potentially avoid a debt default or other missed payments until at least the end of July, the CBO said. That is because of individual and corporate quarterly tax payments due on June 15 and additional extraordinary measures that become available to the Treasury Department at the end of June."

My guess is this is the real aim for lawmakers who seem nowhere close to a real solution. This means we might expect prices to move stagnantly into the summer until that new deadline is reached, or until something else catches the market's attention.

The C-fund price range really tightened up this week. The SPY chart below compares the difference in the range of closing prices over the last month (red dotted lines) and the range of closing prices last week (red solid lines).

Bond prices (F-fund) are also bound by a trading channel during this time of uncertainty. The latest price sits right in the middle.

Thanks for reading.
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Thomas A Crowley
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Updated 05-13-2023 at 08:45 PM by TommyIV

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