Debt Ceiling Update

Negotiations between the White House and House GOP representatives have yet to yield a resolution as the x-date quickly approaches. Spending cuts remain at the heart of the conflict, with Republicans pushing for reductions in non-defense discretionary spending. Democrats have offered to freeze spending at FY23 levels, but Republicans are pushing for even lower levels. Timing constraints and political pressures may force Democrats to accept larger concessions than they had hoped for, with House Speaker Kevin McCarthy committing to allow members 72 hours to read legislation before a vote. Although this sounds like a game of hardball, it does not necessarily indicate a deal is far away, even given current optics. Treasury Secretary Janet Yellen has warned of a high likelihood of an early June default, although there is no definitive date at which a default could occur. Speaker McCarthy has sent members home for Memorial Day weekend, but this does not necessarily mean negotiations have reached an impasse. Members have likely been instructed to be prepared to return on very short notice.

Some important figures to provide more context around the debt ceiling timeline: The daily Treasury statement as of 5/23/23 shows ~$76 billion in cash reserves¹ which gives very little breathing room next week as June 1^st and 2^nd are estimated to bring roughly $140 billion in expenses for things like healthcare and social security, with only $44 billion in tax revenue to offset². However, these calculations are imprecise as more levers laid out by the government coined “extraordinary measures” could help get The U.S. Treasury over the hump for another important date, June 15^th, when Q3 corporate and some individual tax bills will be paid. This date is critical because The Congressional Budget Office expects these tax receipts to allow the government to continue through at least the end of July³, which gives more breathing room from the initial deadline.

The most notable debt ceiling negotiations from recent history took place in 2011 with the U.S. credit rating downgrade of AAA to AA+ by Standard & Poor’s on August 2nd, the first in U.S. history. On that very same day, President Obama passed the Budget Control Act of 2011, allowing the debt ceiling to increase by $2.1 trillion with numerous caveats attached- annual caps and a bipartisan subcommittee tasked with finding $1.5 trillion in cuts that failed to materialize. Standard & Poor’s has recently put the U.S. rating watch "negative" on their latest report.

Overall, it is too early to determine what headaches will come from the debt ceiling negotiations, but looking back on history, it seems unlikely that any material and prolonged default will happen in U.S. Treasuries. A technical default is possible but will probably have little impact on U.S. debt issuances in the long run. It would be no surprise if the short portion of the treasury yield curve continues to climb, and equity markets get choppier from here. However, in times like these, it's critical to remain focused on the long-term investment outlook, which has proven itself many times over that resilience and patience payout to investors.

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¹https://fsapps.fiscal.treasury.gov/dts/files/23052300.pdf

²https://www.nytimes.com/2023/05/18/us/politics/debt-ceiling-xdate.html

³https://www.cbo.gov/publication/59160