Pathstone’s “Meet the Manager” interview series features some of the passionate and committed asset managers with whom we have developed strong relationships. Our goal is to share the depth and breadth of expertise and collaboration that goes into our investment process.

This installment features Libby Cantrill, Managing Director, Public Policy, and Jerry Woytash, Vice President and Portfolio Manager, of fixed income asset manager PIMCO. PIMCO has been focused on active management in fixed income for more than 50 years. Pathstone uses the PIMCO Income Fund (PIMIX) as a core part of our credit risk alternatives asset class, aiming to generate attractive risk-adjusted returns for clients across a variety of fixed income asset classes.

In a discussion with Chris Martin, Director in Pathstone’s Investment Research team, Libby and Jerry provide their take on the current debt ceiling debate and how it might affect the market for Treasuries and other short-term instruments. Their dialogue builds upon Pathstone’s recently published analysis, Debt Ceiling Debate 2023: Our Assessment.

Please note, this interview has been edited for length.

February was a tough month for broad market performance. Inflation for January came in higher than expected and markets are finally buying into the Fed’s narrative that interest rates will and can be at increased levels for longer than was once thought. Treasury yields rose considerably as did inflation expectations on the news.

In mid-January the U.S. Treasury Department bumped up against the legal debt ceiling of $31.4 trillion, limiting its ability to increase debt issuance to pay the government’s bills.  An act of Congress will be necessary to increase or suspend that limit, something that has been done many times (78) since the practice began in 1917.  The U.S. Treasury has resorted to special measures to continue paying its current obligations.  These extraordinary measures are anticipated to run out some time this summer, but the timing will depend on a number of factors including tax receipts.  For now, these measures do not impact payment on any currently due obligations as the Treasury is primarily saving cash by deferring payments to various government pension programs.  Payments to current beneficiaries of these programs continue uninterrupted. 

The details of when these measures will run out and which obligations the Treasury would prioritize is not perfectly clear (estimates suggest July or August).  Regardless of the details, this development certainly raises concerns about the risk of another government shutdown — or worse, an actual default on the interest and/or principal owed to holders of U.S. Treasury obligations (Bills, Notes & Bonds), which has never previously occurred.   

For investors, betting on the outcome of this political game of chicken is purely speculative.  As long-term oriented investors, our primary objective is to be thoughtful about mitigating potential risks considering the various scenarios that may play out.  Below we try to shed some light on common questions and provide some context for investors to put the debt ceiling debate in perspective.