The debt ceiling is the maximum amount the U.S. government can borrow to meet its financial obligations. When the ceiling is reached, the Treasury cannot issue any more bills, bonds or notes. It can only pay bills through tax revenues. The ceiling is currently equal to roughly 120 percent of the country’s annual economic output.U.S. Treasury Secretary Janet Yellen said last week the government could pay its bills only through early June without increasing the limit.
Meanwhile, the cost of insuring U.S. debt against default for five years stood at about 32 basis points on Tuesday, the widest spread since 2013.“The Treasury curve is pricing in some kind of distortion in the Q3-Q4 time period, and that’s consistent with the exhaustion of stop-gap measures that the government can use right now to run down cash balances at the Treasury in order to fund the government,” said Eric Theoret, global macro strategist at Manulife Investment Management.
In 2011, political gridlock in Washington over the debt ceiling sparked a stocks sell-off and took the United States to the brink of default, with the country losing its top-tier AAA credit rating from Standard & Poor’s. In 2021, some equity weakness and anomalies in the pricing of short term Treasury bills showed rising concerns as Congress faced approaching deadlines to fund the government and address the debt ceiling.