What Investors Need To Know as the U.S. Debt-Ceiling Deadline Approaches

Executive summary:

  • U.S. Treasury debt is considered the closest debt in existence to having no default risk. The ongoing game of financial chicken between Congress and the White House puts this assumption in doubt. Treasury Secretary Janet Yellen has estimated that the government may no longer be able to pay its bills starting June 1.
  • In 2011, a standoff over the debt ceiling in Congress resulted in significant market volatility, ultimately leading to an 11th-hour deal among lawmakers to avoid a default. In the aftermath of the drama, the U.S. government’s credit rating was downgraded by S&P.
  • If there is a technical default this time, it is very likely that markets will send the same message to politicians as they did in 2011—that a failure to resolve the debt standoff would likely lead to devastating results.

With the recent meeting between President Joe Biden, House Speaker Kevin McCarthy, and Senate Majority Leader Chuck Schumer unsurprisingly failing to find agreement, political drama over the U.S. debt ceiling is once again playing out in Washington, D.C. Sadly, this isn’t the first time and probably won’t be the last.

Debt-ceiling drama: The 2023 version

By now the circumstances surrounding increases to America’s borrowing limit are all too familiar. Legislatively, there is a limit to how much U.S. debt can be issued, and in order for the U.S. government to spend more money, Congress needs to raise the borrowing limit or debt ceiling.