JP Morgan Expects U.S. Debt Ceiling to Become an Issue Next Month

Paigambar Mohan Raj
Source: Reuters

The U.S. debt ceiling could become a problem as soon as next month, according to JPMorgan. A technical default on U.S. Treasury bonds was considered a “non-trivial risk” by the Wall Street bank.

JPMorgan mentioned that both the debates on the government spending bill and the U.S. debt ceiling could get “dangerously close” to their respective deadlines. According to the bank, by the middle of August, the Treasury may exhaust its supply of resources.

The debt ceiling determines how much money the U.S. government can borrow in order to pay its bills. The Treasury may not issue any additional bills, bonds, or notes after reaching the cap. Only tax money is the only way to pay Treasury Bills (T-Bills).

When does JPMorgan think the U.S. Debt Ceiling will show stress?

According to JPMorgan, “Signs of stress typically start in the T-bill market 2-3 months before the X-date has given money market funds (MMF).” The money market funds are “large holders of T-bills,” who “will begin to more actively advertise that they don’t hold any bills that mature over those dates.”

The United States reached its $31.4 trillion statutory debt ceiling on Jan. 22, 2023. According to Treasury Secretary Yellen, “extraordinary measures” would be taken to help the government fulfill its obligations for at least five months. Yellen made the “extraordinary measures” remark in January.

The X-date is the deadline by which the federal government can no longer fulfill all of its obligations in full. The X-date is now early June. The date is anticipated to be revised by Treasury Secretary Yellen in the coming days.

One of Yellen’s “measures” might be a cap on the total amount of new debt that can be issued. As a result, there will be less demand for U.S. Treasuries, which will drive up prices and drive down yields. Riskier assets benefit from lower rates because they signal a more accommodating monetary environment. However, there is no confirmation from the Treasury Secretary on what steps are being considered.