US Debt Ceiling: Market Risks and Historical Trends
Article published on February 20th, 2025 8:30AM UK Time
The US debt limit, also known as the debt ceiling, is the maximum amount of money that the US federal government is legally allowed to borrow to meet its financial obligations. This includes paying for government spending programs, interest on existing debt, Social Security, Medicare, military salaries, and other expenses. The debt ceiling is set by Congress, and when it is reached, the Treasury Department cannot issue new debt unless Congress approves an increase or suspension of the limit. With borrowing now restricted after the limit was reinstated on January 2, 2025, at approximately $36.1 trillion, the Treasury is expected to rely on extraordinary measures to meet obligations until an expected “X-date” in late Q2 or Q3 of 2025 which could be a default. While a resolution is likely, uncertainty around the timing could lead to disruptions in money markets and Treasury yields, just as seen in previous debt limit standoffs.
Debt Ceiling History: Familiar Territory
The US has faced multiple debt ceiling crises, with Congress suspending and reinstating the borrowing limit a number of times since 2013. Despite close calls, lawmakers have always acted before the Treasury exhausted all available options.
One key tool the Treasury relies on is the Treasury General Account (TGA)—its primary cash balance at the Federal Reserve. The Treasury typically maintains a buffer equal to about five days’ worth of spending (~$700 billion), but if a resolution is delayed, this account will gradually be depleted. In the 2023 debt ceiling standoff, the TGA dropped to just over $20 billion before an agreement was reached.
Potential Risks: Downgrades & Default Scenarios
📉 VIX below 20 → Markets are calm, and volatility is low.
⚠️ VIX between 20-30 → Caution: Uncertainty is increasing.
🚨 VIX above 30 → High market turbulence and potential risk-off sentiment.
🔥 VIX above 40 → Extreme fear, often seen during market crashes.
Historically, VIX spikes above 40 have been associated with major sell-offs in the S&P 500, such as during the 2008 Financial Crisis and the COVID-19 market crash in 2020.
Potential Risks: Downgrades & Default Scenarios
While default remains unlikely, the risk of a credit rating downgrade looms large.
- S&P downgraded the US credit rating in 2011 due to political instability around the debt ceiling.
- Fitch downgraded the US from AAA to AA+ in 2023, citing governance risks.
- Moody’s outlook is now “negative”, signaling potential further action if political dysfunction continues.
Even in a technical default, where payments are delayed but eventually made, US Treasuries would likely remain liquid and tradeable. The Treasury has tools to roll over maturities daily, minimizing systemic disruption. However, a prolonged impasse could further erode investor confidence.
Key Takeaway: Stay Prepared for Volatility
While political brinkmanship may delay an agreement, markets will likely see turbulence leading up to the X-date. Traders and investors should be prepared for potential dislocations in short-term Treasury markets, heightened volatility, and temporary liquidity constraints in money markets.
Ultimately, history suggests Congress will act at the last minute—but until then, uncertainty will drive market stress and portfolio adjustments.