Raising the Debt Ceiling

There will be a vote this spring on raising the debt ceiling. If I am not mistaken the Treasury has maxed-out the current ceiling. After all these years of raising the debt-ceiling, this is probably the first year this will watched as a sporting event. From CNNMoney.com:

Bond experts to Congress: Turn down the volume on the debt ceiling.

Some lawmakers are hoping to use the upcoming vote to raise the cap on federal borrowing as do-or-die time for fiscal responsibility. They say they will only support an increase if Congress goes along with spending cuts.

But bond experts say Congress is engaged in risky business. They say lawmakers should not use the debt ceiling as an artificial deadline for deficit reduction. Instead, lawmakers should focus on crafting a comprehensive long-term plan for fiscal responsibility.

The bond market wants to see a "vision on deficit reduction but not within a politically sensitive time frame," said Jim Vogel, head of interest rate strategies at FTN Financial.

The world's largest bond investor thinks the saber-rattling is ill-advised.

"It's the wrong way to do it. Obviously I'm all for a move to a balanced budget over time. But this is like imposing the death penalty for shoplifting," Bill Gross, founder of PIMCO, told the Associated Press.

Indeed, said William Larkin, fixed income portfolio manager at Cabot Money Management, "Politicians are not always aware of cause and effect. ... You don't want to create a firestorm."

Debt ceiling: What you need to know

The decision to raise the debt ceiling -- which governs how much the Treasury is allowed to borrow -- is often incorrectly equated with an agreement to spend more money. In fact, the need to raise the debt ceiling reflects prior legislative decisions that both Democrats and Republicans have made to spend more.

The bond experts CNNMoney spoke to still believe the debt limit will be raised eventually.

But the way it's raised matters, they say.

"A debt ceiling fight is going to confuse global investors not accustomed to the sometimes Byzantine fights in Washington," Vogel said.

If the market sees the fight as a temporary phenomenon it shouldn't have a major impact, said Calvin Sullivan, chief strategy officer of fixed-income capital markets at Morgan Keegan & Co.

But if the fight is long and ugly before the ceiling is raised, there could be fallout.