The US debt ceiling: Why were markets worrying about it but are breathing a sigh of relief right now?

Over the past fortnight, markets have been worrying about the US debt ceiling. With an in-principle agreement reached to lift it (again), it looks like markets are set to rally once more. But why was this such a big deal in the first place and how long before we’ll have to fret over this issue yet again?

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US debt ceiling lifted

The US debt ceiling is lifted quite often, but there is a stand-off every now and then, including during the last few weeks. The ceiling stood at US$31.4tn and the US risked running out of money to pay all its bills if not lifted before June 5 – hence, markets were fretting over it.

Negotiations between the Biden administration and Congressional Republicans went on for roughly a fortnight before an in-principle deal was reached over the weekend. The futures appear to indicate it will be a positive week for markets – although Wall Street will be closed on Monday for the Memorial Day public holiday.

So when will markets next worry about it again?

It is inevitable that there’ll be another squabble at some point in the future when the US debt ceiling has to be lifted again. A lot will depend on terms of the final deal, including the level the ceiling is raised to and what spending concessions are made by the Biden administration. But the bottom line is that a crisis has been averted for now, but certainly not forever. So maybe next time, investors shouldn’t sell stocks out of fear of a US default, because it’s very unlikely to happen.

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