In January 2023, the US reached the limit of the debt ceiling; however, "extraordinary measures" were implemented to sustain the situation so that the government can meet its payments until early June.
Treasury Secretary -Janet Yellen- has set June 1st as the deadline for the executive and legislative branches to reach a consensus on increasing the debt limit. This would allow the government to avoid the risk of defaulting on its obligations.
Will a consensus be reached?
- The Legislature has acted 78 times since 1960 to permanently increase, temporarily extend, or revise the definition of the debt limit. Historically, a consensus has always been reached. Therefore, Joe Biden is currently negotiating with the Republican leader in the House of Representatives, Kevin McCarthy.
- This issue is politically significant because any agreement reached by Biden on the debt ceiling must be approved by the House of Representatives, where Republicans currently hold the majority.
- The decision not to increase the debt ceiling and exhaust the extraordinary measures would result in a delay in the payment of the government's financial obligations. This would cause instability in the markets and harm US citizens. For this reason, a consensus has always been reached.
- In the event that an agreement is not reached, it is most likely that debt payments will be prioritized, considering the recommendations of the Federal Reserve.
So, what can be expected?
The probability of the US declaring default is very remote given the potential consequences it could bring. Therefore, it is expected that a consensus will be reached next week to increase the debt ceiling.
Furthermore, since the discussions between the legislative and executive branches have not yet reached a consensus, there is an investment opportunity in treasuries expiring on June 1st. These treasuries have become more attractive with a yield of over 5%, compared to treasuries expiring at the end of May, which have a fluctuating yield of around 3%.
