The debt ceiling traces its roots to 1902. The US government wanted to build the Panama Canal and needed to ask Congress for authorization to borrow specifically for that project. During World War I, requesting such authorization on a project-by-project basis became too cumbersome to fund the war effort. To ease that burden, Congress passed a broad-based limit on how much could be borrowed.
Since World War II, that cap has been raised over 100 times!
Over the 20-year period ending in 2022, there were 20 debt limit increases and seven debt limit suspensions.
Exhibit 1: US Debt Ceiling (2003–2022)
Source: US Treasury Department
That brings us to the present: Congress must again come to a decision on whether to authorize additional borrowing. While disagreements over the debt ceiling may increase uncertainty for investors, Congress has historically always reached agreement and raised or suspended the debt limit.
In previous disputes over the debt limit, we have observed reactions in both equity and fixed income markets. However, it is important to recognize that the debt limit is one of many factors that impact security prices every day. For example, five-year US Treasury yields generally declined prior to and after the 2011 debt limit crisis that ended in early August. The fall in yields (which meant Treasury prices were rising) occurred despite uncertainty around the debt limit as well as S&P’s downgrade of the US sovereign credit rating.
Exhibit 2: Daily Five-Year US Treasury Yield, 2011
Source: Federal Reserve Bank of St. Louis
This outcome highlights the challenges in attempting to outguess market prices and shows that making investment choices centered around policy decisions may not be beneficial to investors.