Written by: Meera Pandit
On January 19, the U.S. will have reached the debt ceiling, or debt limit, which is the cap on how much money the federal government is authorized to borrow. However, this will not automatically trigger a default on U.S. debt. The U.S. Treasury can still use funds from the Treasury General Account (TGA), the federal government’s operational account at the Federal Reserve, and it can implement “extraordinary measures” to continue to meet its obligations. Through these mechanisms, Treasury Secretary Janet Yellen expects to finance obligations until early June, although the risk of miscalculating that timing is high depending on the monthly budget deficit.
The current debt limit is USD 31.381 trillion, last raised in December 2021. The first additional source of funding is the Treasury General Account, which stood at USD 322 billion on January 13. Secretary Yellen noted additional “extraordinary measures” to be implemented this month: (1) redeeming existing/suspending new investments into the Civil Service Retirement and Disability Fund (CSRDF) and the Postal Service Retiree Health Benefits Fund (PSRHBF), and (2) suspending reinvestment of the Government Securities Investment Fund (G Fund). As of December 2022, the CSRDF and the PSRHBF combined would have provided about USD 8.4 billion per month in headroom, while the G-Fund had a balance of USD 293 billion. If extraordinary measures are needed from January 19 to early June, about 4.5 months, this would supply about USD 330 billion of headroom. If the Treasury were to suspend the daily reinvestment of the Exchange Stabilization Fund in the coming months as well, that would add USD 17 billion. The CSRDF’s one-time bond maturities (USD 100 billion in June 2023) have added additional space during prior debt ceiling breaches, but those maturities occur at the end of June, possibly too late per Secretary Yellen’s estimate.
Together, the available TGA balance and extraordinary measures could provide nearly USD 670 billion in available funds to meet government obligations. We estimate the cumulative deficit from January through June would be roughly USD 638 billion, meaning available funding could be sufficient. However, our deficit estimates are highly uncertain given the challenges of estimating spring tax receipts since COVID. Therefore, there is still a risk that these sources of funding could be exhausted before June.
Although lawmakers typically wait until the last minute on the debt limit, they usually do come to a resolution. Congress has raised or suspended the debt ceiling 79 times since 1960. While Congress is likely to do the same this time around, the threat posed is whether they get the timing right. If they do not, the consequences of default would be severe: spiking bond yields, higher borrowing costs, plunging consumer confidence, and financial market turmoil and contagion.
For investors, we anticipate a slowdown in economic growth and inflation should bring bond yields down, but debt ceiling risks, although certainly not our base case, could derail the bond market recovery and foment significant volatility if realized.
Source: U.S. Treasury, J.P. Morgan Asset Management. Treasury General Account (TGA), Government Securities Investment Fund of Federal Employees Retirement System Thrift Savings Plan (G Fund), Exchange Stabilization Fund (ESF), Civil Service Retirement and Disability Fund (CSRDF), Postal Service Retiree Health Benefits Fund (PSRHBF). Data are as of January 13, 2023.
Related: What To Do With Fixed Income in 2023