Raising the Debt Ceiling – Update

There are three main developments in the forecasts surrounding the ongoing debt situation that I have been following.

First, the likelihood of a deal by Sunday is very low and sinking. Thus, the market is feeling confident that this situation is going to persists until the most desperate late hours. The President has set an August 2nd deadline, but many experts insist that the U.S. Treasury will be able to hold on a few more days past that until drastic measures would need to be taken.

Second, the markets are very confident that a deal will be struck sometime in August, at just the last moment; this number is approaching 80% and rising. Further, the likelihood of getting a debt ceiling deal by the end of August is very close (and tracking) the likelihood of getting a debt ceiling deal by the end of September. The market expects the matter to be resolved in August, but if it hits September, do not expect the urgency to continue.

Third, yesterday I added a prediction to the ‘Miscellaneous Politics' section of the website – the likelihood of S&P downgrading U.S. Treasury Bills by the end of 2012 and that number is consistently above 50% and rising. The markets are accounting for this possibility. To be clear this is a downgrade from AAA, but the rating can be downgraded and still be investment grade.

Keep your eyes peeled to the below table, because it a very dynamic market!