Does the debt ceiling affect markets?
August 27, 2021

Another day, another debt ceiling circus. The US Treasury has maxed out its congressionally-set debt limit again. It’s nothing new — since 2010, we’ve been dealing with debt ceiling episodes 28% of the time* (see shaded areas below).

The federal deficit, which must be paid for with new debt, has been recently running at 15% of GDP (up from mid-single-digits through the 2010s). With this magnitude of debt, it seems like blocking new issuance could have some impact on markets, so I looked at previous episodes, represented by the shaded areas below:

Debt Ceiling Episodes

As legally mandated, federal debt flatlines during debt ceiling episodes. The Treasury General Account (the government’s checking account held at the Fed), drops during longer episodes and new debt issuance spikes after the ceiling is raised.

My main question was if this blockage-then-flood of new debt could influence the 10 year yield, and possibly equity markets in general. I found a minimal impact. Looking at the longest episodes, many saw a small uptick of 10 year yields during the post-ceiling spike in issuance, and a tick down in markets, but the overall trends in both series are unchanged.

It looks like the US Treasury market is healthy enough to weather some political grandstanding. The fact that there are constantly redemptions and issuance to roll over existing debt certainly helps.

Will this time be different? It’s possible 10 year yields may be artificially depressed due to unprecedented Treasury and Fed actions. Inflation is running above-trend and the real 10 year yield is negative, so it will be interesting to see what happens when net new issuance is allowed to resume.


*Debt ceiling episodes (shaded areas in the chart above) are defined as federal debt being within 1% of the limit for at least 30 days:

Start Stop Days Debt Limit President House Senate S&P △ S&P △
Next 3mo
10Yr △ 10Yr △
Next 3mo
Dec 1, 2005 Mar 17, 2006 65 8.2T Bush R R +3.4%
1,265 → 1,307
-4.3%
1,307 → 1,252
+15bps
4.52 → 4.67
+45bps
4.67 → 5.13
Apr 5, 2007 Sep 28, 2007 65 9.0T Bush D D +5.7%
1,444 → 1,527
-3.2%
1,527 → 1,478
-9bps
4.67 → 4.58
-48bps
4.58 → 4.10
Nov 5, 2009 Dec 24, 2009 34 12.1T Obama D D +5.6%
1,067 → 1,126
+3.7%
1,126 → 1,168
+21bps
3.53 → 3.75
+8bps
3.75 → 3.83
Dec 31, 2009 Feb 11, 2010 28 12.4T Obama D D -3.3%
1,115 → 1,078
+7.2%
1,078 → 1,156
-11bps
3.84 → 3.73
-20bps
3.73 → 3.54
Feb 28, 2011 Aug 1, 2011 109 14.3T Obama R D -3.0%
1,327 → 1,287
-5.3%
1,287 → 1,218
-67bps
3.41 → 2.74
-74bps
2.74 → 2.00
Aug 2, 2011 Sep 21, 2011 36 14.7T Obama R D -7.0%
1,254 → 1,167
+6.6%
1,167 → 1,244
-75bps
2.62 → 1.88
+9bps
1.88 → 1.97
Nov 21, 2011 Jan 27, 2012 45 15.2T Obama R D +10.3%
1,193 → 1,316
+6.6%
1,316 → 1,403
-6bps
1.96 → 1.90
+3bps
1.90 → 1.93
Oct 31, 2012 Feb 1, 2013 58 16.4T Obama R D +7.2%
1,412 → 1,513
+4.6%
1,513 → 1,583
+32bps
1.69 → 2.01
-37bps
2.01 → 1.64
May 20, 2013 Oct 16, 2013 104 16.7T Obama R D +3.3%
1,666 → 1,722
+7.2%
1,722 → 1,846
+71bps
1.97 → 2.67
+17bps
2.67 → 2.84
Mar 16, 2015 Oct 30, 2015 162 18.1T Obama R R -0.1%
2,081 → 2,079
-6.7%
2,079 → 1,940
+5bps
2.10 → 2.15
-22bps
2.15 → 1.93
Mar 16, 2017 Sep 7, 2017 123 19.8T Trump R R +3.5%
2,381 → 2,465
+7.0%
2,465 → 2,637
-46bps
2.52 → 2.06
+31bps
2.06 → 2.38
Dec 11, 2017 Feb 8, 2018 41 20.5T Trump R R -3.0%
2,660 → 2,581
+3.5%
2,581 → 2,672
+47bps
2.38 → 2.85
+12bps
2.85 → 2.97
Mar 4, 2019 Aug 1, 2019 106 22.0T Trump D R +5.8%
2,793 → 2,954
+3.8%
2,954 → 3,067
-83bps
2.72 → 1.89
-17bps
1.89 → 1.73
Aug 2, 2021 28.4T Biden D D

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