{"id":186402,"date":"2023-03-09T11:00:00","date_gmt":"2023-03-09T16:00:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=186402"},"modified":"2023-03-09T11:10:08","modified_gmt":"2023-03-09T16:10:08","slug":"debt-ceiling-standoff-whats-the-timeline-for-investors","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/debt-ceiling-standoff-whats-the-timeline-for-investors\/","title":{"rendered":"Debt Ceiling Standoff: What\u2019s the Timeline for Investors?"},"content":{"rendered":"\n

Key takeaways<\/h2>\n\n\n\n

Tax payments offer temporary relief<\/h3>\n\n\n\n

Tax receipts will buy the government a little time, though how long depends on how much money comes in.<\/p>\n\n\n\n

Extraordinary measures continue<\/h3>\n\n\n\n

Moving money around helps the government stay under the ceiling in the short-term.<\/p>\n\n\n\n

Markets face uncertainty<\/h3>\n\n\n\n

History has shown that market uncertainty will increase as the standoff continues, but the standoff should be resolved without incident.<\/p>\n\n\n\n

Will the US government default on its debt? As the debt ceiling standoff between Democrats and Republicans continues, that question is getting louder. We have several months left before a possible default, and the prevailing uncertainty may be uncomfortable for investors. But opposing sides should come to an agreement and avoid the country\u2019s first-ever default. Let\u2019s look at a potential timeline of past and future events and what investors might expect.<\/p>\n\n\n\n

Government hits debt ceiling \u2013 Jan. 19, 2023<\/h2>\n\n\n\n

The federal government hit the debt ceiling on Jan. 19, 2023. Reaching a legal threshold of just under $31.4 trillion, it could no longer borrow money to meet existing obligations. The government has since resorted to \u201cextraordinary measures\u201d to pay bills. That translates to prioritizing debt payments and delaying less critical payments (such as contributions to government pension funds) until the ceiling is raised.<\/p>\n\n\n\n

Tax payments come due \u2013 April 18, 2023<\/h2>\n\n\n\n

With the government\u2019s line of credit cut off for now, the only money it can spend is from its savings account (the Treasury General Account) and its income \u2014 our taxes.<\/p>\n\n\n\n

Tax Day arrives this year on April 18. That\u2019s the date by which Americans must file their personal tax returns, barring an extension. The Treasury General Account already has a relatively high cash balance, and tax receipts will add to it, but issuing debt is still necessary to meet our obligations over time. How much time our taxes will buy the government depends on many factors, including the state of the domestic economy and the actual amount received.<\/p>\n\n\n\n

Extraordinary measures run out \u2013 as early as June 2023<\/h2>\n\n\n\n

The accounting measures that Treasury established in January have bought the government some time. Predicting when those measures will run out isn\u2019t an exact science, but according to US Treasury Secretary Janet L. Yellen in a letter to Congressional leadership, extraordinary measures should last through June 5. There\u2019s a lot of uncertainty around that estimate.<\/p>\n\n\n\n

Cash balance likely exhausted \u2013 late August to October 2023<\/h2>\n\n\n\n

Once extraordinary measures run out, the Treasury will likely have enough cash to pay its debt obligations for most of the summer. And there may be a small boost of cash in September, when many corporations will make their estimated tax payments for the third quarter. That could give the government until October to avoid default.1<\/a><\/sup><\/p>\n\n\n\n

What does this mean for investors?<\/h2>\n\n\n\n

Coming up with a more precise date is impossible given all the moving parts. The further along we get in this process, the more uncertainty markets will face, and the more investors may decide to seek out less risky options for their portfolios (see my recent chartbook for an illustration of which asset classes outperformed and underperformed<\/a> during the 2011 debt ceiling debate).<\/p>\n\n\n\n

Remember, the 2011 debt ceiling standoff led to S&P downgrading the federal government\u2019s credit rating for the first time in the government\u2019s history. That happened four days after<\/em> Congress voted in favor of a debt ceiling increase. The market\u2019s reaction to an actual default would be much worse.<\/p>\n\n\n\n

I don\u2019t expect this standoff to end in default, however. And as I illustrated in a previous blog, while US equities declined during the debt ceiling standoffs of 2011 and 2013, they posted substantial returns<\/a> in the 12 months following their resolution. As of today, there\u2019s time to avoid the worst-case scenario, and brighter days could follow. <\/p>\n\n\n\n

Footnotes<\/strong><\/p>\n\n\n\n