What The Debt Ceiling Means For Your Penny Stocks
Right now a battle royale is taking place in Washington DC. On one side of the aisle are the Republicans controlling the House of Representatives. On the other side are Democrats holding the Senate and the White House.
Their fight is over the debt ceiling.
See, Congress put in place a limit on how much money the government can borrow. The number is a staggering $10 TRILLION!
The scary part is were at risk of passing those levels any day. As it now stands, current estimates by the US Treasury put us at risk of running out of money on August 2nd.
Nobodys surprised our government is a heavy borrower.
Its been that way for years. But without raising the debt limit, the government will be unable to make many of the payments they need to. It means our military might go without pay. It means seniors might miss social security checks. And it means the interest on our debt might go unpaid.
The whole fiasco is garnering more attention than a royal wedding!
Despite all the hoopla and the resulting media circus, I think your time is better spent worrying about something else.
Heres why.
One of the biggest risks of a default is going to be the US government credit rating. Should Congress do the unthinkable and let the government run out of money, were guaranteed to see the credit agencies move our rating lower.
And as a result of lower ratings, we should see the cost to borrow money go up immediately.
It makes sense. The riskier an investment is, the bigger a return investors will seek. Thats why triple-A rated corporate bonds pay lower interest rates than triple-B rated bonds and junk bonds pay even higher rates of interest.
Remember, the financial markets are always forward looking.
A lot of times the market corrects early for a rating change. If a ratings change is expected, youll see the price of the bonds move before the actual change is announced.
Thats why I looked with interest at the most recent yields for the US Governments 10 year bond. Take a look at the chart.
Weve been dealing with the debt ceiling crisis for several months now and all thats happened is the yield has moved lower. If there was a real risk of default, wed see the yield shooting higher.
Whats that mean for you and your penny stocks?
It simply means the bond market (and some of the smartest guys in the world) dont really see a risk of the US Government defaulting on debt payments. In all likelihood, the politicians will make a lot of noise and do a bit of grandstanding up till the 11th hour.
Then in a speed rarely seen in Washington, theyll come to an agreement and pass the debt ceiling extension.
So all the wild gyrations will be for naught and anyone with heartburn over this issue is simply worrying themselves sick. If you ask me, Id keep a watch on a number of interesting penny stocks. And if I see them trade lower with the market, use it as an opportunity to stock up.
When its all said and done in two weeks, the debt ceiling debate wont even warrant a footnote in the history books.
Until next time,
Brian Walker
Category: Breaking News
