Debt Ceiling Scenarios

We see the risks to the negotiations skewed toward a relatively benign outcome, but believe that the upside/downside to risk/markets is skewed negatively. See our views in this article on various debt ceiling scenarios and how we’re positioned.

Overview:
We see the risks to the negotiations skewed toward a relatively benign outcome, but believe that the upside/downside to risk/markets is skewed negatively.

1. Markets near their highs already, pricing in little risk of default and ignoring continued stress in banking sectors and general weakness of global economic data.
2. Markets not yet focused on the anticipated issuance wave to follow resolution of the debt ceiling.
3. Any risk on rally post-resolution expected to be minimal/short lived.

Scenarios:

1. Base Case: 11th hour deal struck (70%)
   • Short-term extension may be required to iron out the details of a deal, write the legislation, allow time for the CBO to opine, etc, prior to bringing to a vote, but only if a deal is “done”; 3 month “can-kicking” unlikely
   • Brief ‘risk on’ (higher equities, rates, commodities), but risk rally short-lived as mostly already priced in already
   • Markets then quickly shift focus to anticipated T-bill issuance wave (upwards of $1T of additional issuance through the end of Q3)
     • Rising TGA (Treasury General Account; expected to rise from ~100bn to ~$600bn)
       mostly offset by falling RRP (reverse repo) balances and bank reserves (think QT) at the
       Fed
     • Slightly higher front end yields
     • More downward pressure on bank deposits (and credit creation in turn)
2. Partial Government Shutdown (25%)
   • Debt principal and interest payments prioritized, avoiding a technical default
   • Other payments delayed, including federal and military salaries and contractors; social security prioritized ahead of salaries and contracts, but after debt payments
     • Increased uncertainty, temporarily reduced consumer spending
   • ‘Risk off’ (lower equities, rates, commodities); weaker USD
   • Possible U.S. debt downgrade which would further the bid for Treasuries (lowers investors’ average quality, driving a bid to higher quality bonds which would still include Treasuries)
   • Increased political pressure leads to a deal before a technical default occurs
3. Default (5%)
   • Missed payments on Treasury interest and principal
   • Treasury would need to extend the maturity date of maturing issues in order to maintain their
   • Fed-wire eligibility
   • Ex-maturity bonds would trade at a discount to par driven by market pricing of the timing of
     eventual resolution
   • Sharp ‘risk off’ (lower equities, rates, commodities); weaker USD
   • U.S. debt gets downgraded, driving a sharper rate rally

NCA Positioning:
We have positioned portfolios more defensively. We have added duration with reduced exposure to risk assets due to what we perceive as skewed risks around the negotiations, the longer-term impact of an eventual deal (particularly regarding issuance and liquidity), ongoing stress in banking and broader risks related to an economic slowdown.

Important Investment Information
Past performance is no indication of future results. There is no guarantee that the investment objective of the strategy will be achieved. Index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. Clients must be prepared to bear the risk of a total loss of their investment. The themes and strategies and asset allocations herein are not to be construed as recommendations. They are
for illustration purposes only and subject to change without notice.

Certain of the information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. New century advisors believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.

The discussion of any investments in this presentation is for illustrative purposes only and there is no assurance that the adviser will make any investments with the same or similar characteristics as any investments presented. The investments identified and described do not represent all of the investments purchased or sold for client accounts. The representative investments discussed were selected based on a number of factors including investment process and subject matter applicability. The reader should not assume that an investment identified was or will be profitable. There is no assurance that any investments identified will remain in client accounts at the time you receive this document.

Certain performance calculations are prepared internally and have not been audited or verified by a third party. The use of a different methodology for preparing, calculating or presenting performance returns may lead to different results and such differences may be material. You may not rely on this presentation as the basis upon which to make an investment decision.
Opinions expressed are new century advisor’s present opinions only and are subject to changes based on market, economic and other conditions and may not actually come to pass. Any historical price(s) or values(s) are also only as of the date indicated.

One cannot invest directly in an index. The index/benchmark comparisons herein are provided for informational purposes only and should not be used as the basis for making an investment decision. There are significant differences between client accounts and the indices/benchmarks referenced including, but not limited to, risk profile, liquidity, volatility and asset composition. Benchmark and market data is provided by a third party. New century advisors does not guarantee or warrant the accuracy, timeliness, or completeness of third party information provided and is not responsible for any errors or omissions.

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or proposed by NCA will be profitable or equal any historical performance level(s).

Certain portions of New Century Advisors, LLC newsletters, white papers, etc., may contain a discussion of, and/or provide access to, New Century (and those of other investment and non-investment professionals) opinions and/or recommendations as of a specific prior date. Due to various factors, including changing market conditions, such discussion
may no longer be reflective of current opinions and/or recommendation(s). Moreover, no client or prospective client should assume that any such discussion serves as the receipt of, or a substitute for, personalized advice from New Century Advisors, LLC, or from any other investment professional. New Century Advisors, LLC is neither an attorney nor an accountant, and no portion of the content included in this document should be interpreted as legal, accounting or tax advice.

No part of this material or any NCA content may be reproduced in any form, or referred to in any other publication, without
the express written permission of the New Century Advisors, LLC.