Last night, Representative Paul Ryan (R-WI) took one step closer to becoming the next speaker of the House of Representatives when Speaker John Boehner retires next Friday. While this may represent welcome certainty over the speakership, there is arguably lesscertainty surrounding the resolution of two significant fiscal deadlines: the debt ceiling, which needs to be raised by 3 November, and the government funding bill, which needs to be passed in order to avoid a shutdown by 11 December.

The debt ceiling issue is the more pressing – and from the market’s perspective – the more crucial deadline. Conventional thinking has been that Speaker Boehner, as his last act in Congress, would move a “clean” debt ceiling bill and defy his conference by passing the bill with all Democrats and a small minority of Republicans. Speaker Boehner has done this before – and would do it again, knowing that this is the only type of bill that would pass both the Senate and be signed into law by President Obama.

But this scenario gets increasingly complicated as we get closer to speaker handover next week. In fact, if Speaker Boehner is not able to move a clean bill before next Wednesday (and no one thinks getting the 218 required votes on such a bill will be easy), the chances of a policy mistake increase significantly.

Why? We see two reasons.

  1. Rep. Ryan has not supported a clean debt ceiling increase in recent history; he voted against the clean debt ceiling increases in both 2013 and 2014.
  2. More importantly, it is reported that Ryan, in order to secure a tacit endorsement from hardline Republicans, the Freedom Caucus, pledged that he would adhere to the so-called “Hastert Rule” – a House norm requiring that a bill can only be brought up if it secures the majority of the Republican party. A clean debt ceiling increase would fail this test.

Similarly, any debt ceiling bill that would include policy riders, such as spending cuts that could get a majority of Republicans, would not pass the Senate and would not be signed into law by the President, leading to a standoff and potential breach of the debt limit.

What does this mean for investors? If Speaker Boehner is not able to resolve the debt ceiling issue by next Thursday, when Ryan will likely be voted in as the new speaker, the chances of a debt ceiling breach under Ryan’s watch increase significantly. Either way, we can expect more market volatility as we get closer to the deadline with no resolution.

This article was written by Libby Cantrill, EVP at PIMCO.

Subscribe to our free daily newsletters!
Please enter your email address to subscribe to ETF Trends' newsletters featuring latest news and educational events.