US Debt Ceiling 'X-Date' Approaching. Beware of Possible Volatility.

The countdown to a potential US debt default has begun. Meeting among US President Joe Biden, House Speaker John McCarthy, and other congressional leaders on the ongoing impasse over the US debt ceiling made little progress on Tuesday EST.

In modern US history, there has yet to be an actual default. The debt ceiling event mainly influenced the capital markets through several uncertainties, such as the bipartisan negotiation process, with the default risk usually not fully factored into asset prices until around one month before the date when the US government may no longer be able to fund itself (commonly known as X-Date).

Predictions of the X-date are widely varied from banks:

In retrospect, except for 2011 and 2013, there was relatively little market volatility during the debt ceiling crisis phase. This year, similar to 2011 and 2013, with US politics torn, and two houses of Congress under bipartisan control, may face market volatility.

The debt ceiling crisis caused significant volatility in market risk appetite and a rise in the VIX. During the debt ceiling crisis in 2011, the VIX climbed rapidly from 17.52 on 22 July to 48.0 on 8 August, and the price of gold quickly rose from US$1,601/oz on 22 July to US$1,793/oz on 10 August, an increase of 12.0%. In 2013, the VIX rose from 13.1 on 20 September to 20.3 on 8 October.

To learn from history, investors may face the upcoming risk aversion sentiment and higher market volatility in the following weeks.