Here We Go Again: Debt Ceiling Edition
Lawrence Gillum | Chief Fixed Income Strategist
Last Updated: January 21, 2025
While the new Donald Trump administration is still assembling, the outgoing Treasury Secretary, Janet Yellen, left a reminder that government business waits for no one. In a recent letter to lawmakers, Yellen warned that the U.S. would hit its debt ceiling today (January 21) and that the Treasury Department will begin “extraordinary measures” to stave off the threat of a technical default.
The debt limit — commonly called the debt ceiling — is the maximum amount of debt the Treasury Department can issue. The amount is set through Congress and has been regularly increased over the years to finance the government's operations. Congress last agreed to suspend the debt ceiling for roughly a year and a half as part of a bipartisan deal struck between President Biden and House GOP leadership in 2023 that also included limits on spending subject to lawmakers’ annual funding process. But that agreement ended at midnight on January 2, 2025, so Treasury has had to revert to extraordinary measures to make sure there is sufficient cash on hand to pay its bills.
In the letter, Yellen noted that the agency will stop paying into certain accounts, including the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund, to make up for the shortfall in money beginning Tuesday. Upon lifting or suspending the debt ceiling, these funds will be made whole. But these temporary measures are expected to provide roughly $320 billion of additional borrowing capacity for the Treasury. However, with the federal government expected to run deficits this year of around $2 trillion, that additional borrowing capacity could fill up quickly. The additional borrowing capacity should be enough to get the government to the March/April period, when tax receipts will provide additional financial buffers.
Moreover, Treasury also has more than $600 billion in its General Account, which is held at the Federal Reserve, that it can use in case of emergency. Treasury is allowed to maintain a “standard one-week cash balance, adjusted for uncertainty and risk,” so if the additional borrowing capacity erodes too quickly or if tax receipts are less than expected, the Treasury can draw down its general account cash balance to ensure that it doesn’t miss an interest or principal payment. This gives Congress and the new president time to, once again, get out of this self-inflicted kerfuffle — likely until the summer months. But once those measures run out, the government risks defaulting on its debt unless lawmakers and the president agree to lift the limit on the U.S. government’s ability to borrow.
Treasury Has More Than $600 Billion on Hand to Pay its Obligations
Treasury General Account (As of January 15, 2025)
Source: LPL Research, Bloomberg 01/20/25
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.
Summary
U.S. bond market investors have endured a lot lately, so the last thing they want to see is the government hold hostage the full faith and credit of the government’s willingness and ability to pay its debts. While its ability to repay its obligations is not in question, the debt ceiling debate complicates the country’s willingness to pay its debts. While we think Congress will act in time and either raise, suspend, or even eliminate the debt ceiling, these games of political chicken can introduce volatility to markets in the meantime.
Is there a potential silver lining for fixed income investors? Noted in Yellen’s letter to Congress, was that a “debt issuance suspension period” would begin on Tuesday, January 21, 2025, and last through Friday, March 14, 2025. With the amount of Treasury securities expected to come to market over the next few years to fill budget deficits, this suspension period could provide some well-needed (albeit temporary) relief from supply/demand concerns that have helped push Treasury yields higher recently.