Playing chicken with the debt ceiling

NEW YORK (CNNMoney) -- 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."

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.

"The perception of U.S. credit quality would be permanently impacted," Sullivan said. "The faith in the U.S. Treasury is the closest thing we have to risk-free securities. Playing a game of chicken with the debt ceiling is the nuclear option."

Of course, ultimately, the perception of U.S. credit quality could also be permanently affected the longer it takes the United States to address its long-term fiscal shortfalls. (Data visualization: Where our money could go in 2020)

Whether or not a spending-cut deal is secured in the debate over the debt ceiling, the bond market isn't expecting much in the way of real deficit reduction in the first half of 2011, Vogel and Larkin noted.

Why? Less than three weeks after the president's bipartisan debt commission delivered a proposal in December that would reduce U.S. debt by $4 trillion over the next decade, Congress passed an $858 billion tax cut deal brokered between President Obama and the Republicans.