US debt limit next major risk factor? - Nomura

The debt limit The Bipartisan Budget Act of 2015 suspended the statutory debt limit up through 15 March, 2017. 

Key Quotes:

"Starting 16 March, the Treasury Department has been taking “extraordinary measures,” such as suspending investments or temporarily disinvesting securities held in federal employee retirement funds, to continue to meet its obligations.

However, these extraordinary measures will most likely be exhausted by October or November, at which point Congress will need to pass a new debt ceiling limit or a debt ceiling suspension.

Given the urgency, Treasury Secretary Mnuchin has emphasised the need for increasing the statutory debt limit “as soon as possible” to Congress.6 Among a number of negative consequences, the Government Accountability Office has emphasised that failing to raise the debt limit in a timely manner could have serious negative consequences for the Treasury market and increase borrowing costs.

A recent Federal Reserve study found that the 2001 and 2013 debt-limit episodes may have increased yields by 4-8bp on all Treasuries.8 Nevertheless, the risk that Congress fails to suspend or raise the debt limit is low in our view. 

Congress has frequently modified the statutory limits to avoid catastrophic consequences, totalling 20 times between 1993 and 2014 (21 times including Bipartisan Budget Act of 2015).

Given the size of potential negative consequences, the incentives for Congress to suspend or raise the debt limit on time are high. However, based on history, it is unlikely that Congress will deal with this issue before the August recess."