- It will not risk US insolvency (debt can still be rolled over)
- It will force truth into the media. There is no denying what a balanced budget looks like when you are forced to run one.
- It will re-assert reality in the markets, possibly destroying the "Bernanke Put"
Let's look briefly at what is likely to happen. Basically, the bond market can react in any direction, but the outcome for all are somewhat long-term positive.
Bond markets rally:
If the bond markets act positive on this sign, simply because it means a temporarily balanced budget, this will prove a very important point - higher debts mean higher interest rates, lower or stable debt means relatively lower interest rates. Regardless of how the media spins it, that will be the only conclusion that can be drawn. Likewise, if the debt ceiling is later lifted, bond markets may actually sell off in strong disapproval.
However, I find this scenario to be somewhat unlikely.
Bond markets are indifferent:
This too, would prove an important point, namely that there won't be any death or destruction in the bond markets simply because the debt ceiling isn't raised. Obviously, a withdrawal from government stimulus of 10-15% of GDP will mean an enormous recession, but in regards to the bond markets, it will (just like if bond markets rally) prove that the whole "the US can't pay its bills unless the debt ceiling is raised"-talk is pure nonsense. However, I think this too is somewhat unlikely. Most likely is ....
Bond markets initially sell-off, and then rebalance
Markets behave irrational short-term. Due to the amount of nonsense regarding the US fiscal position and what a debt ceiling blocking would mean, I think it is in fact likely that US bonds would initially sell off after such a decision. Why? Because it is a wake-up call that clearly shows the dire fiscal position the US is in. There is little risk of a complete collapse though, simply because of the following : If US bond rates sky-rocket because of a debt ceiling - who do you think will step in to purchase enormous amounts? My guess is Bill Gross, among others. Why? Because Bill Gross has a brain and knows an opportunity when he sees it. Imagine long-term bond rates jumping 2 percentage points on pure irrationality (I don't think such a large move could occur, but lets imagine). How golden an opportunity is this if you know that the risk for a US default hasn't increased one bit, rather it has actually slightly decreased. That's free yield for a yield-starved market. And remember - the rollovers are in fact completely safe under a debt ceiling.
The interesting part, however, and this is pure speculation on my behalf, is that I think US debt would actually be priced somewhat higher after such an event. When the debt ceiling is eventually raised (through some sort of compromise, or because whoever is filibustering simply runs out of political willpower to continue), maybe people actually start getting it. Maybe increases in US debt will actually be treated like the potential future disasters that they are. Maybe people will realize that there won't always be a larger idiot who you can flip your bond to "before its too late".
Conclusion:
No matter what we think the bond markets will do if a Senate filibuster actually occurs - all the possible cases above are clearly an improvement of the long-term outlook of the US economy. Basically, a debt ceiling filibuster would be a heroic act of political suicide, that should be applauded by anyone understanding the disastrous position the US government is in.
....on second thought, there is one single risk with doing it. Ben Bernanke could panic, and announce that he will buy unlimited amounts of US Treasury debt, thinking it would calm markets. That is what they call a hyperinflationary trigger, and in that case, the US dollar may be worth no more than toilet paper before the summer is over.
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