Debt ceiling

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Risk management - borrowing - United States.

The debt ceiling is the maximum aggregate amount of gross debt, which can be issued by the US Treasury.


Under the US Constitution, Congress must authorise any additional borrowing.

In situations when the total borrowings need to be increased to service outstanding borrowings, failure to agree an increase in the debt ceiling could lead to a default on US Treasury securities.


Odds of a US default low, but consequences could be dire
"As politicians talk in Washington about the possibility of a government breach of the debt ceiling, preparations are being made on Wall Street and in US government agencies for a broad array of disturbing contingencies.
Even enumerating the possible effects of a default is disturbing. They could range from a containable event, consisting of a missed payment on a specific Treasury bill that affects a fairly small number of creditors, to something far more cataclysmic: the suspension of all Social Security checks and debt payments by the United States government, accompanied by a sudden meltdown of world markets and a recession.
As former Treasury Secretary Jacob Lew said last month in a Council on Foreign Relations meeting, 'I think it’s pretty safe to say that if we were to default, it makes the odds of a recession almost certain.'...


Concern about what might happen in the early days of June is the main reason for an anomaly in the yields of Treasury bills.
Money market fund managers nervous about a possible default have been avoiding Treasury bills that come due then, lowering prices and pushing up yields to a level 0.6 percentage points higher than Treasury bills that mature in July.
By August and September, the assumption is that some degree of normality will have returned, and factors like inflation and the Fed interest rate policy reclaim their customary dominance.
Yields for bills that mature later in the summer and in early fall are higher than those in July.


[This pattern] is unusual.
It implies two things. First, the markets believe there is a real risk of a default in early June. Second, the possibility of a protracted failure of the United States to pay its bills is seen as extremely low.
That’s because the problem is fundamentally political, not financial.
The markets will supply the United States government with all the money it needs, if only Congress grants the authorization to borrow it.


The Treasury market is the deepest and most liquid in the world. Demand for Treasuries is robust and is likely to remain so, as long as the credit of the United States is unimpaired.
But a US debt default could change all of that, and another downgrading of US debt, as was the case in 2011 when the United States came close to default, could increase US borrowing costs.
New York Times, What the Markets Are Saying About the Risk of a Debt Default, 19 May 2023.


See also