US Debt Ceiling

On January 19th, 2023, the United States reached the technical debt limit of $31.4 trillion.1  However, there are ways in which the US Treasury can continue to meet the financial obligations of the government without breaching the debt ceiling.  Now, Congress and President Biden are focused on reaching a deal to raise the statutory debt limit before the United States defaults on its debt, which could be as soon as June 1st.  Additionally, lawmakers are weighing alternative strategies such as a short-term debt limit increase to allow both parties additional time to negotiate as June approaches.

Each year, the United States government receives income or revenue from federal taxes to meet most of its financial obligations.  For many years, the government has had a budget deficit, meaning they don’t receive enough income to meet their obligations.  So, to meet these additional requirements, the US Treasury borrows money by issuing treasury bills and bonds and adds to the national debt.  There is a maximum amount of borrowing that can happen, the debt ceiling, and this level cannot be surpassed without Congress’ approval. 

The debt ceiling was created in 1917 when Congress instituted the Second Liberty Bond Act.  This allowed the US Treasury to issue bonds without Congressional approval as long as the total amount of debt fell under the statutory debt limit.  Since 1960, Congress has raised, extended, or revised the debt limit 78 times.2  The debt limit talks have occurred under both Republican and Democrat administrations as shown in the chart below.

Currently, the US Treasury department is using extraordinary measures to ensure the US government does not default on its debt.  They can achieve this by suspending certain government investments or by exchanging various types of debt within internal Treasury accounts.  These types of actions can only extend the potential default for so long before a resolution is needed by Congress. 

US Treasury Secretary Janet Yellen has stated that the US government may no longer be able to satisfy obligations after June 1st, 2023.3  Although this date could be pushed to later this year, should lawmakers come to a short-term resolution, the scenario of a US default may cause a number of issues not only for financial markets but for government-funded programs.  Some potential effects of Congress failing to find a resolution include:

  • US Treasury rates would likely rise as investors demand a premium for the increased risk. Rising rates are a headwind to bond prices. 
  • Volatility in global equity markets would remain elevated on the uncertainty of timing around debt resolution and the ramifications of a potential shutdown in services
  • The US Dollar could lose its value relative to other currencies
  • Social Security checks could stop being paid to beneficiaries
  • Medicare/Medicaid benefits would freeze
  • All other government programs such as Defense funding would stop

While the ramifications of the US failing to meet its financial obligations could be severe, debt ceiling discussions are not unfamiliar and we have experienced these situations in the past.  Gradient Investments will continue to monitor actions with regard to resolution of the debt ceiling but expect volatility to rise as we progress closer to, and potentially even surpass, the June 1st anticipated deadline date.  It is entirely possible that markets face a correction as a result of these issues, and the longer the stalemate, the greater likelihood that the market reacts negatively.  However, we would view a market correction based on debt ceiling debates to be temporary in nature and would continue to focus on business fundamentals as the long term drivers of the US stock and bond markets.