History of 2011 debt-ceiling crisis shows divergent asset impact

Background

Despite the U.S. averting a default on its debt, the debt-ceiling crisis sparked comparisons to 2011’s standoff, with riskier assets among the worst hit.

Equities and emerging market currencies were among the biggest losers during 2011’s debt ceiling crisis, while U.S. Treasuries held up notably well on haven demand. A scenario test of a Bloomberg cross-asset model portfolio suggests stocks would be hit the hardest, while Treasuries would outperform, according to Bloomberg’s Multi Asset Risk System (MARS).

This debt ceiling crisis had the potential to be the most damaging yet, Anna Wong, chief US economist at Bloomberg Economics wrote, coming at the end of the steepest hiking cycle by the Federal Reserve in a generation. There were concerns that the Treasury needed to replenish its cash buffer to pay its obligations, which could have caused a $1 trillion liquidity drain by the end of the third quarter and contribute to higher short-term funding rates.

As the Treasury prepared for a surge in longer-term debt sales to fund the widening deficit, the market braced itself for a potential wave of higher bond yields. With sales of government notes and bonds expected to exceed $1 trillion this year and nearly double next year, borrowing costs were set to increase as the Federal Reserve continued to reduce its balance sheet.

The issue

The 2023 debt-ceiling crisis increased risk even before the potential default date, with a Bloomberg Economics recession-probability model showing a surging likelihood of a recession in recent months.

Looking back, the period of July 22 to August 8, 2011 ultimately contributed to a downgrade in U.S. credit on August 5. During this period, global equities declined by an average of 13%, with the S&P 500 index down 17%. Asian benchmarks such as South Korea’s KOSPI limited their losses to single-digits. Turkish, Indian and Malaysian sovereign bonds were among the biggest losers, while Treasuries strengthened on haven demand.

The prices of insuring sovereign bonds of Brazil, Mexico and Sweden against default soared at least 44%, while Japan and Israel’s CDS remained relatively calm. Currencies of South Africa, Mexico, Brazil and Turkey fell at least 5%, with modest losses for those of Thailand, Korea, Malaysia and Singapore.

Tracking

Run Bloomberg’s SHOC and MARS functions to stress-test hypothetical bespoke scenarios, like how the U.S. debt-ceiling crisis would affect a model portfolio. Run SHOC to use a prebuilt scenario on the debt-ceiling crisis.

Run MARS <GO> to stress-test portfolios and perform cross-asset scenario analyses across multiple customizable scenarios on your portfolios, using the complete set of Bloomberg pricing libraries.

For more information on this or other functionality on the Bloomberg Professional Service, request a demo with a Bloomberg sales representative. Existing clients can press <HELP HELP> on their Bloomberg keyboard.