Looming US debt ceiling fight is starting to worry investors

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NEW YORK – The debt ceiling battle looms large in the United States again, giving investors yet another worry for markets this year.

Analysts said the deadline set by the US government to raise the $31.4 trillion debt ceiling may be faster than expected, raising the risk of a debt default that could have wide repercussions in global financial markets.

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The recurring legislative confrontations over debt limits of the past decade were largely resolved before they spilled over into the markets. However, this was not always the case, and a protracted standoff in 2011 prompted Standard & Poor’s to downgrade the US credit rating for the first time, sending financial markets reeling.

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Some investors worry that the GOP’s narrow majority in Congress may make it difficult to reach a compromise this time.

Here is a Q&A about the implications for the markets:

What is the debt ceiling?

The debt ceiling is the maximum amount that the United States government can borrow to meet its financial obligations.

How long before “X-DATE”?

US Treasury Secretary Janet Yellen said in January that the government could only pay its bills until early June without increasing the limit imposed by the government in January.

Some analysts have predicted that the government will exhaust its capacity to cash and borrow — the so-called “date X” — sometime in the third or fourth quarter, but weaker-than-expected tax receipts for the April filing season could push that deadline forward.

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Goldman Sachs analysts estimated that if April tax receipts fall 35% or more year over year, the Treasury Department could announce a debt deadline in early June. But if receipts are less than 30% over, the deadline is likely to be late July.

“While there was a time when the Treasury was seen as having sufficient funds until August or even September…the focus has now been pulled back to June, or even late May,” BMO Capital Markets analysts said. .

What can the Treasury do to meet its obligations?

He can use available cash and extraordinary measures to generate cash once the debt limit is reached.

The US Treasury brought in total tax revenues of $129.82 billion on April 18, the annual tax filing deadline. The groups brought total deposits into the Federal Reserve’s Treasury general account to $283.53 billion that day, with a closing balance of $252.55 billion after withdrawals.

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Do Bond Prices Reflect Default US Risks?

Some T-bills feature a premium in their yields that may be associated with a higher default risk, according to some analysts.

Three-month Treasury bill yields hit a new 22-year high of 5.318% on Thursday.

“T-bills tell us that money market funds and others are avoiding bills that could be affected by the government shutdown,” said Steve Sosnick, chief strategist at Interactive Brokers.

Data from S&P Global Market Intelligence showed that spreads on US five-year CDS – market measures of default risk – widened to 50 basis points, more than double the level in January.

The cost of insuring US debt against default for one year has been more than 100 basis points — well above 2011 levels, when a standoff over the debt ceiling led to the US government’s first credit downgrade.

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What happens if the United States falls behind?

The high risk of default may prompt some investors to shift funds to international stocks and bonds of foreign governments.

At the same time, ironically, potential defaults could also lead to flight to quality, which would push down Treasury yields.

In 2011, a political stalemate in Washington over the debt ceiling led to a stock sell-off and pushed the US to the brink of default, with the country losing its AAA credit rating from Standard & Poor’s.

Goldman Sachs said in a research note that the S&P 500 fell 15% during the 2011 crisis, with stocks most exposed to US federal spending falling 25%.

In 2021, some weakness in equities and imbalances in the pricing of short-term Treasury bills showed growing concerns as Congress faced approaching deadlines for financing the government and addressing the debt ceiling.

A US debt default would likely send shock waves through global financial markets, as investors would lose faith in the US’s ability to repay its bonds, which are seen as among the safest investments and serve as building blocks for the global financial system.

“This could leave some permanent scars, including a permanent increase in the cost of financing US federal debt,” said David Kelly, chief global strategist at JPMorgan Asset Management.

(Reporting by Davide Barbuscia; Additional reporting by Saqib Iqbal Ahmed; Editing by Megan Davies and Josie Kao)