Q2 2023: A Tale of Two Different Responses to the Debt-Ceiling Saga

Executive summary:

  • Equity and fixed income markets experienced heightened volatility amid the Q2 debt-ceiling saga, while currency and derivatives markets were mostly unaffected.
  • Regional banks struggled in Q2, with deposits and witnessed credit spreads widening by 100-200 bps to all-time highs.
  • The U.S. dollar defied expectations and remained resilient throughout the second quarter, even during the teeth of the debt-ceiling crisis.

Fears that the U.S. government could default on its bills for the first time in history rippled through equity and fixed income markets during the first two months of the quarter, while foreign exchange and derivates markets escaped the drama largely unscathed. After Congress reached a deal to lift the nation's borrowing limit in early June, however, a wave of calmness spread across most asset classes—with the notable exception of some areas of the fixed income market, particularly regional banks.

At Russell Investments, our experience executing trades for a broad swath of clients affords us unique and valuable insights into the latest market trends. We trade over $2.2 trillion annually through our multi-venue trading platform and maintain a 24-hour trading desk with access to over 100 countries globally. Our trading desk covers all asset classes, including equity, fixed income, foreign exchange, and derivatives. Here are our key observations from the second quarter of 2023.


When debt-ceiling discussions began in the U.S. Congress in early February of this year, the equity Volatility Index (VIX) remained stable, and volumes in equity markets aligned with expectations. However, when it appeared that discussions between the White House and Republican party leaders were starting to fall apart in mid-March, the VIX shot up by over 30%, signaling an expected, potentially drawn-out negotiation process. This, in turn, sparked a spike in volume and a broad selloff in equity markets.

As the second quarter progressed, both the House of Representatives and the Biden administration continued to work through key differences, striking a deal right before the early June deadline when the U.S. government would have run out of money to pay its bills. Interestingly, the eleventh-hour agreement marked a near repeat of how a similar saga played out in 2011. In the wake of the early June deal, equity markets returned to a more normal trading pattern, with the VIX stabilizing and the broad equity indexes moving higher.