(Bloomberg) -- A potentially unified US government could make it easier to reach an agreement to suspend or lift the debt ceiling before the Treasury Department’s borrowing authority is exhausted, according to some Wall Street strategists.
The debt cap is set to be reinstated at the start of next year, prompting the Treasury to take measures to avoid breaching that level before Congress passes legislation to suspend or lift the ceiling. Before Donald Trump’s election victory, strategists’ early read placed the deadline on how long the government has before running out of funds around August 2025 at the latest.
Now, Barclays Plc and JPMorgan Chase & Co. say it’s more likely that the episode is resolved sometime in the second quarter after Republicans gained the White House, took control of the Senate and appeared on the cusp of a narrow majority in the House.
“The timing of the debt ceiling suspension depends more on politics than the Treasury’s economics,” Barclays strategist Joseph Abate wrote in a note to clients on Thursday. “Getting a bill to the House floor may not be quick and the ceiling may not be suspended until late spring.”
The timing is important to the market and the sooner it’s resolved, the less the impact. But the debt ceiling is a favorite cudgel of Congress as lawmakers tend to reach agreements at the last minute. These standoffs typically send front-end rates lower as the Treasury reduces its supply of short-term government debt. But, investors also tend to dump bills most vulnerable to a potential default in favor of securities maturing before or after the so-called X-date, creating a kink in the curve. The longer the standoff, the greater propensity of market dislocations.
Before the debt ceiling is reinstated on Jan. 2, the Treasury is required to reduce its cash pile to around $700 billion by the end December from its current level of roughly $840 billion to comply with the legislation. In addition to those funds, the government will have about $320 billion available through extraordinary measures including suspension of daily investments to the Federal Employee’s Thrift Savings Plan and the Exchange Stabilization Fund, according to Barclays.
Because the debt ceiling is unlikely to be the top priority for the new government, both Barclays and JPMorgan expect Treasury to deplete some of its extraordinary measures and cash balance. Barclays estimates the cash balance will be around $450 billion by the end of March, while JPMorgan sees it around $550 billion. The Treasury targeted $850 billion at last week’s quarterly refunding announcement, assuming an agreement is reached.
Even if Congress procrastinates on reaching an agreement, this is expected to be a less contentious debate, according to JPMorgan. Historically the most combative debt-ceiling episodes have taken place under a Democratic president and Republican-controlled House, as was the case in 2011, 2013, 2015 and 2023 when agreements were reached with less than a week until resources would’ve been exhausted. Less combative were debates in 2017 and 2019, according to JPMorgan.
“Looking at recent debt-ceiling episodes, we think the 2025 backdrop has the most in common with 2017 and 2019, and between the two, 2017 strikes us as the best analog,” strategists led by Jay Barry wrote in a note earlier this week.
During 2017, it took Congress about six months to suspend the debt ceiling. Even though it took another five months to reach a longer-term agreement, the legislation that year was negotiated with enough time before the X-date that it wasn’t a big event for financial conditions, Barry said.
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