The U.S. Debt Ceiling, The Next Episode

Key takeaways
- The US Congress is again being asked to raise the federal borrowing limit, or debt ceiling.
- On January 19, US Treasury Secretary Janet Yellen notified Congress that the debt ceiling had been reached and should be raised by June 5, or the government risks running out of funds to pay its obligations.
- Since then, the US Treasury has utilized “extraordinary measures” to meet its obligations. We estimate that these measures could last beyond June 5 and into the third quarter.
- We are optimistic the US Congress will pass legislation to raise the debt ceiling (or temporarily suspend it), although the decision will likely go down to the wire and the process could be contentious.
- We expect US Treasury bills (T-bills) that mature in the third quarter to be the most affected and yields to rise significantly on a relative basis.
- However, yields on T-bills that mature after the third quarter could be pressured downward in the near-term as the US Treasury cuts T-bill supply to comply with the current debt limit constraints.
The US debt ceiling has taken center stage once again, as media coverage has increased in recent weeks. On January 19, US Treasury Secretary Janet Yellen notified Congress that the federal borrowing limit of USD31.4 trillion had been reached, meaning that the debt ceiling must be raised or the US government risks running out of funds to pay its obligations1. While the Treasury can employ certain tactics to bridge the gap in the short term, Congress must agree on legislation in the coming months to avoid default2.
The US Treasury market is regarded as one of the largest and most important markets in the US financial system, with around USD24 trillion of outstanding marketable securities.3 This sector is considered the “backbone” of the US fixed income market because it is systemically important to the economy. It enables the US government to borrow to meet its legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds and other payments. A default could trigger unprecedented economic and financial disruption that could reverberate beyond the US domestic market.