U.S. Capitol building

Navigating the current debt limit episode

Debates over federal fiscal policy and rising debt levels, along with continued differences in views of government spending priorities, have led to a series of contentious debt limit episodes in recent years.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

While the details for each debt limit episode are unique, we are once again facing the prospect of a debt limit standoff in a matter of weeks.
We provide herein some context, our perspective on the current situation and insights into how our assets are positioned in light of the latest data.

Key considerations

01

A debt limit impasse has presented itself once again, thrusting a possible funding crisis on the United States, if Congress does not raise or suspend the debt ceiling by June.

02

The “X-Date” (when the Treasury Department's ability to finance the operations of the federal government comes to an end) is now expected to occur as early as June 1, 2023 per guidance from Treasury Secretary Janet Yellen in her letter to congress on May 1, 2023.

03

While uncertainty around the debt limit can be unnerving for investors, we take comfort in the fact that the full faith and credit of the U.S. Treasury has always been honored, and BlackRock remains confident that a default on Treasury debt obligations is a very low probability outcome.

We take the view that legislative and execution risks around debt limit episodes should be respected and factored into portfolio strategies. We continue to closely monitor the situation, seek to manage our exposures in a conservative manner, and keep our clients informed as the debt limit episode unfolds.

  • The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligation.

    In a recent letter to Congress, Treasury Secretary Janet Yellen stated that the U.S. Treasury “will be unable to continue to satisfy all of the government’s obligations by early June, and potentially as early as June 1.”1 Secretary Yellen pressed that “it is imperative” Congress act “as soon as possible” on a debt ceiling resolution that “provides longer-term certainty that the government will continue to make its payments."

    In the event the debt limit is not eventually raised or suspended, the U.S. Treasury would likely face a funding crisis that could impact a range of federal commitments and strain financial markets.

  • Prior debt limit episodes have historically had the largest impact on the U.S. Treasury Bill (T-bill) market, typically exhibited as an aversion to maturities deemed by the markets as most vulnerable to potential delayed payment risks from a “technical default.”

    Such aversion had already begun to play out prior to updated guidance about the “X-date” from Secretary Yellen, and has subsequently become more pronounced given the accelerated timeline for a debt limit resolution.

    In our opinion, conditions are still developing and further risk aversion on the part of market participants is possible in the event given a resolution remains subject to heightened political risks.

  • In previous cycles, T-bill outstandings declined in the run-up to debt limit dates in order for the U.S. Treasury to both comply with statutory borrowing limits and also provide headroom for Treasury coupon settlements.

    Following a similar pattern, while net T-bill issuance is up approximately $300 billion year-to-date through early May, it has contracted on a monthly basis since January and turned substantially negative in April.2 That said, we anticipate a significant increase in T-bill supply upon a resolution of the debt ceiling. This additional T-bill supply should, in our view, provide some relief to current front-end Treasury and repurchase agreement rates.

  • Major credit ratings agencies have published reports on the potential for delayed payment on U.S. debt as a result of the debt limit. According to Moody’s, a nationally recognized statistical ratings organization (NRSRO), any missed debt payment would be considered a default, triggering a downgrade of the U.S. sovereign and all Treasury security ratings3. Fitch Ratings, another NRSRO, has stated that reaching an "X-date" without having raised the debt limit could likely have negative implications for the U.S. sovereign rating4.

  • Given the guidance we received from Secretary Yellen, where appropriate we have proactively exited all early June 2023 exposure in our portfolios and would consider a similar approach should the guidance around the “X-date” change.

    We are monitoring developments in Washington and will look to continue to manage potentially susceptible exposures in an appropriate manner.

While these planning initiatives are consistent with our approach to liquidity, BlackRock remains confident that a default on Treasury debt is a very low probability outcome. We will continue to closely monitor the situation for updates and seek to manage our exposures in a conservative manner.