Goldman on Debt Ceiling Uncertainty
Goldman Sachs Asset Management published, "Debt Ceiling Uncertainty: What Does it Mean for Money Markets?" They tell us, "The US debt ceiling is back in focus. After being suspended in 2023 -- allowing the federal government to borrow as needed -- the limit was restored on January 2, 2025, and set to the outstanding debt level of ∼$36.1 trillion at that date. Debt ceiling drama is primarily a US saga that plays out almost every other year and may lead to disruption. In the past, volatility and weakness in the US Treasury market has occurred over the timing for an agreement and fears of the Treasury being unable to continue paying the nation's bills and the US defaulting." The piece explains, "With the debt ceiling back and once again limiting additional borrowing, its reinstatement will likely cause the Treasury to utilize a series of cash-saving tools known as 'extraordinary measures'.... However, at some point, this account will reach a so-called 'X-date' if no resolution materializes -- the point at which the Treasury runs out of money and enters technical default, which we believe could fall around late 2Q or 3Q 2025. In 2023, on the final day of the debt limit standoff, the TGA dwindled down to $22 billion." It says, "In this article, we take a closer look at how money markets have typically reacted to past debt ceiling episodes. While a resolution is likely, we also examine why we believe the Treasury has the capacity and intention to prioritize principal and interest payments should we cross the 'X-date' and enter technical default territory.... The legal limit on the amount of money the US government can borrow has been suspended and reinstated seven times since 2013, rising from $16.7 trillion to today's ∼$36 trillion. Despite close calls, in each of the prior instances, Congress has always acted to raise the debt limit before 'extraordinary measures' and the Treasury's cash balance were exhausted. Finally, Goldman writes, "When considering what a technical default might look like for US Treasuries, our view and understanding of the 'Operational Plans for Various Contingencies for Treasury Debt Payments' paper from the Treasury Market Practices Group leads us to believe Treasuries would remain as liquid, transferable and marketable assets in a default scenario. The technical default could be viewed as a delay of payment in which maturities are rolled one day at a time until a resolution is reached by Congress. Additionally, there is no provision for cross-default among US Treasuries. Based on prior debt ceiling episodes, political brinkmanship may mean a resolution is not found until the eleventh hour once again, resulting in potential market volatility. We will continue to assess the situation and scenarios as they develop, making portfolio adjustments in real-time as information presents itself. Active risk management is important in constructing and maintaining resilient portfolios should stressed scenarios ultimately arise."
