The Washington brief

Special Commentary

March 6, 2023

U.S. debt default remains unlikely, but rocky road ahead for markets

Executive summary

  • We view a U.S. federal debt default as unlikely, as we expect a debt ceiling extension with modest reforms will be enacted before the August recess.
  • However, we anticipate a more prolonged political debate, rattling markets at times as the debt ceiling issue fully ripens in the summer.
  • Though not a perfect guide, the 2011 U.S. debt downgrade was the last similar episode. During that period, equity investors turned increasingly defensive in the months leading up to the debt ceiling deal.
  • Volatility was subsequently exacerbated by the downgrade of U.S. government debt. Moreover, industries with outsized exposure to government spending experienced heavier initial selling pressure as debt ceiling negotiations stalled.
  • The 2011 flight-to-quality by investors impacted 10-year U.S. Treasury yields by more than 1% in the span of two months. Given our current expectations of contentiousness, the likelihood of a negative bond market reaction is increased as the deadline nears. 


The debt ceiling sometimes referred to as the debt limit is the self-imposed maximum amount of debt that the U.S. Treasury can issue. This borrowing finances government operations including Social Security and Medicare benefits, tax refunds, military salaries, and interest payments on outstanding national debt, among other things.

Changing the debt ceiling, which can be done by increasing the total amount of allowable debt or by suspending the debt ceiling for a period, requires a bill to pass Congress and be signed into law by the President.

Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents.

Our take

We view a default on U.S. debt as unlikely. Yet, we also foresee the likelihood that a prolonged debt ceiling debate – and the potential for fiscal austerity – would rattle financial markets. Ultimately, while it will likely be a rocky road fraught with significant political peril, we expect a debt ceiling extension with modest reforms will be enacted before the August recess.

We anticipate that the debt ceiling issue fully ripens in the summer and that it will be addressed starting in the House in June. We also believe that the situation in the Senate will force the President to engage in some level of negotiations.

  • In our view, moderate House Republicans don’t want a default, though also want some spending reductions. For those reasons, they may not vote with Democrats in any early effort (perhaps in March/April) to pass a debt extension, instead keeping their options open in the event of timeline changes.
  • Republican budget hawks will have difficulty advancing the most extreme cuts, and, while the President’s budget will serve to keep parties together, will have to settle for fewer spending reductions than some Republican members would prefer. 

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