Debt Ceiling Update: Parties Setting Up for Battle Royale

Key Developments

• Without a debt ceiling suspension or increase, the US could run out of cash during the first week of June (Chart 2). The X-date could be pushed back through additional extraordinary measures.
• House Republicans have passed, by a majority of two, a bill that would lift the debt ceiling until end-March 2024 in exchange for $3tn of cuts in expenditures over 10 years.
• The administration has deemed the cuts unacceptable, demanded a clean debt ceiling increase and, until recently, refused to negotiate.
• A first meeting between President Biden and senior Congressional leaders occurred on 9 May and made little progress.
• Working-level negotiations between White House and House Republican staffers have started.
• A follow up meeting between Biden and Congressional leaders is tentatively scheduled for Tuesday 16 May.
• An agreement seems unlikely before the X-date when the US runs out of cash, as the parties are too far apart.
• Once the US hits the X-date, it is likely to prioritize interest payments to avoid a default.
• Any Treasury market instability would be met by a strong Fed policy response, through RP and securities lending as well as outright purchases.
• The administration’s repeated threat of issuing debt over the limit suggests it could do so if an agreement is not found soon after the X-date. A long standoff would likely tip the economy into recession and greatly lower President Biden’s re-election chances.

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed, the IMF, and the World Bank. She joined Macro Hive soon after its inception.

Mustafa Chowdhury comes with over 30 years of experience in the industry. He has held senior positions at several leading firms, including Voya Investments (formerly ING US), Deutsche Bank, Bear Stearns and Freddie Mac. He has a wealth of knowledge and expertise in trading, research, and portfolio management of G-10 Macro Rates, MBS and Derivatives.

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