Two distractions creating uncertainty for the treasury market right now are the debt ceiling and who said what at the Fed. Both annoyances should fade away, one in a few weeks, the other possibly not until sometime in the first half of 2016.

The debt ceiling law dates back to shortly before the Second World War.  It covers the total federal debt; the current limit is $18.1 trillion. The Treasury Secretary says that the debt will be hit the first week in November as all the extraordinary measures to conserve cash are exhausted. Most of the time there is enough room between the current total debt and the ceiling that ceiling doesn’t matter much. However, every so often the amount of debt approaches the ceiling and Congress must pass a bill to increase the ceiling. Practically speaking lowering the debt isn’t an option. However, surpluses during the Clinton administration did somewhat reduce the debt and leave more room below the ceiling.

Since Congress must approve all tax and spending bills, it is not clear why the debt ceiling is necessary. However, the periodic debt ceiling battles give Members of Congress an excellent opportunity to complain to the government about the government – so permanently eliminating the debt ceiling isn’t too likely.

What to spend or tax is economics, the debt ceiling is politics. There will be a lot of political grandstanding and noise.  But everyone knows that defaulting rather than raising the debt ceiling would be disastrous. The debt ceiling will be raised in the end and then everyone will claim to have saved the day at the last moment. However, in the run-up to “victory” we could see yields on treasury securities scheduled to mature between now and November 15th jump higher or crash.  The chart below, from a recent report by the Congressional Research Services (see #R43389) shows T-bill yields during some previous debt ceiling debates.

Subscribe to our free daily newsletters!
Please enter your email address to subscribe to ETF Trends' newsletters featuring latest news and educational events.