Tensions over debt limits ease as red wave boosts chances of deal

(Bloomberg) — A potentially unified U.S. government could make it easier to reach a deal to suspend or lift the debt ceiling before the Treasury Department’s borrowing authority is exhausted, according to some Wall Street strategists.

The debt ceiling is set to be reinstated early next year, prompting the Treasury Department to take steps to prevent this level from being exceeded before Congress passes legislation to suspend or eliminate the ceiling. Before Donald Trump’s election victory, an early read from strategists set a deadline for how long the government has before running out of resources by around August 2025 at the latest.

Now Barclays Plc and JPMorgan Chase & Co. say that the episode is more likely to be resolved sometime in the second quarter, after Republicans capture the White House, take control of the Senate and emerge on the cusp of a narrow majority in the House of Representatives.

“The timing of the debt ceiling suspension depends more on Treasury politics than economics,” Barclays strategist Joseph Abate wrote in a letter to clients on Thursday. “It may not be quick to get a bill into the House of Representatives and the cap may not be suspended until late spring.”

Timing is important for the market and the sooner the problem is resolved, the smaller the impact. But the debt ceiling is a favorite cudgel of Congress because lawmakers tend to reach an agreement at the last minute. These impasses usually cause interest rates to be lower at the start, as the Treasury Department reduces the supply of short-term government bonds. But investors also tend to dump the bonds most vulnerable to potential default in favor of securities that mature before or after the so-called X date, creating a kink in the curve. The longer the impasse, the greater the chance of market disruption.

Before the debt ceiling is reinstated on Jan. 2, the Treasury Department must reduce its cash pile to about $700 billion by the end of December, from the current level of about $840 billion, to comply with the legislation. In addition to these funds, the government will have approximately $320 billion available through extraordinary measures, including the suspension of daily investments in the Federal Employee’s Thrift Savings Plan and the Exchange Stabilization Fund, according to Barclays.

With the debt ceiling unlikely to be the top priority for the new government, both Barclays and JPMorgan expect the Treasury to deplete some of its extraordinary measures and cash balances. Barclays estimates the cash balance will be around $450 billion at the end of March, while JPMorgan expects it to be around $550 billion. When announcing the quarterly repayment last week, the Treasury Department targeted $850 billion, assuming an agreement is reached.

Even if Congress delays reaching an agreement, this is expected to be a less contentious debate, according to JPMorgan. Historically, the most combative debt ceiling episodes have occurred under a Democratic president and a Republican-controlled House, as was the case in 2011, 2013, 2015 and 2023, when an agreement was reached within a week before resources would be exhausted. According to JPMorgan, the debates in 2017 and 2019 were less combative.

“Looking at the recent debt ceiling episodes, we think the 2025 backdrop has the most in common with 2017 and 2019, and between the two, 2017 seems like the best analogy,” strategists led by Jay Barry wrote earlier this week in a note. .

In 2017, it took Congress about six months to suspend the debt ceiling. Although it took another five months to reach a longer-term deal, the legislation was negotiated well before X date that year so it was not a major event for financial conditions, Barry said.