There is no denying that this round of debt ceiling negotiations has been the most fraught since 2011. However, the realisation that a delay in a deal would have potentially catastrophic and unpredictable consequences for US and global equity markets appears to have brought the two sides to the table. Both Democrats and Republicans have made compromises to secure a deal that pushes debate of this subject to the other side of next year’s US presidential election.

Short term, this will undoubtedly create a further relief rally for risk markets, given the removal of a significant tail risk. However, we now move from a period where the Treasury has been drawing down their general account (by the order of $360bn in the first five months of this year) to now needing to build its balances back up. To what extent they build this back up is open to debate, but they will want to run a significantly higher margin than has been the case recently and may well want to take it back to the US$ 600 – 650bn that it averaged in early 2022. This will likely be through a significant rise in US T-bill issuance and the debate will be around how quickly they want to restore the previous healthy margins for the general account, especially when there is an ongoing withdrawal of liquidity also from quantitative tightening.

The debt ceiling agreement does lead to a reduction in spending, but estimates point towards this effect being around a 0.1 – 0.2% decrease in GDP over the next 2 years. However, the probability is that the resolution of negotiations has moved the Treasury account from being a significant stimulant to the US economy to a significant drain. Combined with the marginal, though still negative effects of the spending cuts, the US economy, which was surprisingly robust the first half of this year, looks set to soften into the second half.

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