For a long time, US Treasuries have been widely regarded as the world's safest "risk-free assets" because the United States, as the world's strongest country, has never defaulted on its debt.
However, on January 19th of this year, the US government's debt had already reached the statutory limit of $31.38 trillion, which means that the US Treasury Department will not be able to continue issuing Treasury bonds until Congress passes relevant legislation to raise the debt ceiling.
Without external assistance, the US Treasury Department has been forced to use its Treasury General Account and cut or suspend unnecessary expenses. In addition, the high Treasury yields have further increased the interest expenses for the US government. This combination of factors has made the US Treasury Department increasingly tight on funds, raising concerns among global investors.
When is the debt ceiling "X date"?
1) Wells Fargo analysts: mid-August
$Wells Fargo(WFC)$ analysts believe that although the US debt reached its limit in January this year, there has been no progress in both parties' efforts to raise the debt ceiling over the past few months. On the other hand, due to the economy being too strong in 2022, there will inevitably be a tax revenue rollback in 2023.
Analysts predict that
if Congress fails to legislate to raise the debt ceiling, the most likely date for a US default on its debt will be in mid-August.
As the deadline for individual tax returns in the US is usually in mid-April, April is typically the month in which the Treasury Department receives the most tax revenue. However, there are concerns that the Treasury Department's tax revenue situation in April of this year is not ideal.
2) Goldman Sachs analysts: at the end of July
According to Goldman Sachs statistics, the Treasury Department's total tax revenue has decreased by 29% compared to the same period last year since April.
Goldman Sachs analysts predict that
the weakness in tax revenue in April will bring forward the risk of a US debt default, increasing the probability that the Treasury Department's "final deadline" for raising the debt ceiling will be in June of this year.
However, Goldman Sachs believes that extraordinary measures available on June 30, as well as mid-June est. tax deadline, could still buy time for the Treasury Department.
Therefore, the "final deadline" for raising the debt ceiling is more likely to be at the end of July. Although Goldman Sachs still believes that the two parties in the United States will reach an agreement before the "final deadline," the risk of a failure to do so is the highest since 2011.
How will a delay in US debt-ceiling increase affect market?
In 2011, Standard & Poor's, one of the world's three major rating agencies,downgraded the US Treasuries rating for the first time due to the debt ceiling issue. Goldman Sachs has constructed a factor model based on this situation and found that it has had the greatest negative impact on US economic growth and market liquidity.
The European debt crisis also hit global markets in the summer of 2011. In the figure below, method 1 selects the observation period between 7/22-8/10, when the debt ceiling issue had the greatest impact on the US, and statistics on asset performance were conducted.
In method 2, Goldman Sachs simulates the impact of the debt ceiling crisis causing a significant reduction in US economic growth (a 2% decline in future GDP) on various assets.
Regardless of which method is used, the US stock index $S&P 500(.SPX)$ falls by more than 16%, credit risk rises significantly, market volatility soars, and $Gold - main 2306(GCmain)$ prices rise. All of these are linked to the US debt ceiling.
Conclusion
In short, the status of US Treasury in modern finance can be described as "too big to fall".
Therefore, major bank analysts unanimously believe that although the two parties in the United States have differences in their governing philosophies and are currently deadlocked on the debt ceiling issue, considering the almost fatal impact of a US Treasury default on the US financial industry and even the global financial system, the eventual passage of the debt ceiling is highly probable, albeit with some surprises.
The uncertainty brought about by the prolonged stalemate in the game is certainly not what market participants want to see.
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