How are the debt ceiling negotiations going? 0:59

New York (CNN) -- The stock market might be expected to soar after the White House and House Republicans reached an interim agreement to raise the debt ceiling, but markets may have other plans.

The stock market, for the most part, has been ignoring the serious risks associated with U.S. debt default. Even if Congress passes a bill to raise the debt ceiling and President Joe Biden signs it, it could be months before stocks and other financial markets spring into action.

"One of the concerns I have is that even in the run-up to a deal, when it does happen, there can be substantial distress in financial markets," Treasury Secretary Janet Yellen said last week.

"We're just seeing the beginnings of it," he said, referring to the volatility of stock and bond markets in recent days.

  • This contains the agreement on the debt ceiling in the US.

House Speaker Kevin McCarthy speaks as he meets with President Joe Biden to discuss the debt limit in the Oval Office of the White House, Monday, May 22, 2023, in Washington. (AP Photo/Alex Brandon) (Credit: Alex Brandon/AP)

The immediate impact on the market of a debt ceiling agreement

If markets ultimately get what they want – no debt default – they will have to buckle up for a potentially tough journey immediately after the deal is signed.


That's because the Treasury Department will have to immediately replenish the cash it consumed during the period of extraordinary measures in which it could not borrow any more money.

According to Michael Reynolds, Glenmede's vice president of investment strategy, this will create more competition from investors. After weighing their options, many investors may consider the return on investing in U.S. Treasuries to be better than that of stocks. That will temporarily suck some liquidity out of the stock market, he said.

  • Kevin McCarthy on US Debt Ceiling: Democrats Just Want to Keep Spending

What is the so-called US debt ceiling? 1:15

A Look Back at the 2011 Debt Ceiling Crisis

In 2011, lawmakers reached an agreement to raise the debt limit just hours before the U.S. defaulted. Two days later, Standard & Poor's downgraded U.S. debt for the first time in history.

It took two months for the shares to recover the losses resulting from the downgrade and the initial sales that led to the so-called date X, when the government no longer has the capacity to meet all its financial obligations.

Could history repeat itself?

"It wouldn't be surprising if the pattern of 2011 were repeated," says George Mateyo, chief investment officer at Key Private Bank.

While he does not expect a major credit agency to downgrade U.S. debt before or after a deal is reached to raise the debt ceiling, he said the current stalemate could lead to a major loss of confidence in the U.S. financial system.

That's why he foresees market volatility for months, even when a deal is reached.

"Just because we get the debt limit raised, we're not out of the woods," Mateyo told CNN.

Debt ceiling