Prepare for more stock-market jitters after the debt-ceiling deal, Morgan Stanley warns

• The debt-ceiling deal could drive up stock-market uncertainty, according to Morgan Stanley.
• Joe Biden and Kevin McCarthy agreed to suspend the US borrowing limit Saturday evening.

Investors should brace themselves for a rise in uncertainty in the aftermath of the 11th-hour debt-ceiling compromise, according to Morgan Stanley.

The bank said Sunday that while news of a tentative deal to suspend the borrowing limit "should bring a sigh of relief", it could inject more volatility into markets.

"It is important to think about the risks that follow once the debt ceiling impasse is resolved," Morgan Stanley's head of quantitative research Vishwanath Tirupattur said in a note to clients.

"The relative calm that pervades markets seems puzzling to us," he added, referring to stock, bond, and credit market "fear gauges" indicating much lower volatility levels than during March's regional banking crisis.

President Joe Biden and House Speaker Kevin McCarthy said Saturday evening that they had agreed on a deal to suspend the debt ceiling through to January 2025 while restricting spending in the 2024 and 2025 budgets.

If that passes through Congress, it'll prevent a potentially catastrophic default – with Treasury Secretary Janet Yellen warning last week that the government could otherwise run out of money as early as June 5.

The last time the US got so close to its so-called "X-date" was in 2011, when the benchmark S&P 500 stock-market index plunged 12% in the three weeks after lawmakers voted to raise the debt ceiling.

Morgan Stanley isn't expecting that level of market chaos again – but Tirupattur flagged several looming issues that could rattle stock prices even after the potential crisis in Washington has been resolved.

In 2011, the ratings agency S&P slashed the US's sovereign debt rating once a deal to raise the debt ceiling had been voted through – and Fitch Ratings similarly put the US's triple-A rating on downgrade watch last week.

Ratings downgrades weigh on the creditworthiness of an issuer of debt – in this case, the US – and could drive up future borrowing costs.

That, in turn, could weigh on stock prices because, as borrowing becomes more expensive, government spending levels are likely to fall.

Morgan Stanley's Tirupattur said the Treasury would also likely issue a flurry of bills in a bid to raise more cash once a debt-ceiling deal has been voted through Congress.

Investors snapping up these short-term bonds could "drain liquidity in the system" for stocks and other assets, Tirupattur wrote.

Read more: Wall Street is bracing for stock market chaos as the debt-ceiling face-off drags on