by Blaine Dickason
Senior Vice President
Trading and Fixed Income Portfolio Management
Now that individual taxpayers have submitted their 2022 tax returns and Tax Day 2023 is in the rearview mirror, a largely self-made crisis surrounding raising the debt ceiling will begin to resonate through the halls of Congress, possibly lasting through the summer months. Despite Congress having authorized current federal spending in prior budget approvals, last year’s budget deficit of nearly $1.4 trillion combined with a slower pace of tax receipts so far in 2023 has now pushed the U.S. Treasury very near its debt ceiling of $31.4 trillion. It appears likely that the U.S. Treasury will exhaust its cash balances sometime between June and August due to the uncertainty tied to both the pace of tax receipts received this past week and additional estimated tax payments expected later in June.
We’ve prepared the following FAQs as well as provided a graphic from a Goldman Sachs report to help our readers become better informed on this topic:
What is the debt limit? The debt limit is the maximum amount of money the federal government can borrow to meet its current obligations. It currently sits at nearly $31.4 trillion and was last raised in December of 2021 from its prior level of $28.9 trillion.
What is the “X-Date”? This is the date that the U.S. Treasury will no longer be able to pay its bills without increasing the current debt ceiling.
Why is June 5, 2023, important? This is the date through which Treasury Secretary Janet Yellen has said the Treasury General Account will have enough cash to meet its obligations, and therefore the earliest that Congress will have to solve for raising the debt limit without triggering any risk of default.
Why is the X-date timing uncertain? Current year tax receipts have already been running significantly below prior year levels, primarily due to much lower capital gains realizations in 2022 versus 2021. If the April tax revenue continues at its current pace, the “X-date” will likely occur later in July. In a research note published early in the week, Goldman Sachs estimated that any further shortfall in tax receipts this week could pull the “X-Date” forward into early June, although that differs from their base case.
Why should investors care? Some prior debt ceiling negotiations were accompanied by heightened market turmoil, including short-term dislocation to Treasury bonds maturing near or after “X-Date.” The 2011 negotiations triggered a short-term yet acute bout of market volatility, only exceeded by the Great Financial Crisis and the COVID-19 crisis during the last 30 years, as “risk-off” sentiment prevailed and financial conditions tightened considerably. The S&P 500 declined nearly 14% during the third quarter of 2011, containing that year’s deadline. However, that short-term weakness ultimately delivered a buying opportunity for stocks as the S&P500 rallied over 30% in the subsequent 12 months (9/30/11 – 9/30/12).
Why does this keep happening? Congress has raised the debt ceiling 78 separate times since 1960, including 49 times under Republican presidents and 29 times under Democratic presidents, as leaders of both parties have historically recognized this action as necessary. More contentious negotiations, including those in 2011 and 1995-6, have occurred during first-term Democrat presidents and after a midterm election where one or both houses of Congress changed over to Republican leadership. This is also the position we find ourselves in today, which is why there is heightened concern that politicians may deliver a similar performance again this year. Notably, in the 10+ years between 1995, 2011 and current negotiations, there was significant turnover in members of Congress, with fewer carryovers from prior “hot stove” moments.
How might the current debt ceiling debate be resolved? While we believe a U.S. government default is unlikely, past precedent suggests it may take some market pain before Congress is properly motivated to lift the debt limit once again. The negotiations between Congress and the White House will likely commence in the coming weeks, after the Treasury provides an updated tally of Tax Day receipts next week. Ultimately, this will come down to a political calculation by both parties if any self-inflicted pain from risking the creditworthiness of the U.S government is worth any possible political gain.
Bottom line: we believe the current debate will be resolved and the debt limit will be raised for the 79th time in history. The only uncertainty remaining is the degree of short-term market turmoil the politicians are willing to endure before a successful conclusion to this debate. Any associated market selloff in the interim should be viewed as an opportunity. Winston Churchill suggested Americans could be counted on to do the right thing — after they’ve tried everything else. We hope Congress disproves his mild cynicism and does the right thing straight away.
Source: Treasury, Goldman Sachs Global Investment Research
Takeaways for the Week
By Thursday of this week, approximately 16% of S&P 500 members had reported their first-quarter earnings. Estimates for the current first quarter reporting season now forecast revenue growth of 2% and earnings decline of 5% versus the same period last year for this benchmark stock index
This week, the United Nations reported that India was due to become the most populous nation on Earth, surpassing the population of China by mid-2023