Why the Bond Market Isn’t Worried About the Debt Ceiling

Staff members sit on the Senate steps at dawn on Tuesday as lawmakers struggled to approve President Donald Trump’s tax and spending bill. (Al Drago/Getty Images)

The bond market wasn’t alarmed when President Donald Trump’s tax and spending bill struggled to pass the Senate—and it isn’t going to be alarmed if there’s a hang-up at the House—even though the legislation contains a crucial $5 trillion increase to the cap on the federal debt.

That is counterintuitive because the consequences of not raising the debt limit and effectively failing to pay back the nation’s creditors would be catastrophic. It would obliterate the trust investors place on the world’s largest debt market, send prices of Treasury debt into the trash bin, and disrupt financial markets worldwide.

The disastrous repercussions are part of why bond traders have remained calm, assuming the U.S. would never default on its debt, irrespective of the political fighting. The U.S., unlike a household, controls its own currency and can print money, making fear that the U.S. would be unable to repay its debts appear unrealistic.

It also helps that strategists such as J.P. Morgan’s Jay Barry and BMO Capital Markets’ Ian Lyngen see a healthy cushion of time remaining before the Treasury Department comes so close to the debt limit that it would theoretically run out of cash as spending exceeds revenue. Barry puts the so-called X date at Sept. 2, while Lyngen has pegged it at mid September.

Tax receipts have been healthy, taking the Treasury account to $304.841 billion, slightly above expectations. That has given Republicans more time to pass the legislation and raise the debt limit, keeping the bond market calm.

The yield on 10-year Treasury debt fell 0.191 percentage point in June as prices for those securities have risen. Yields fall when bond prices are gaining.

Still, the market hasn’t been devoid of worries. Treasury Secretary Scott Bessent has warned that the U.S. will exhaust its borrowing capacity by August, not September. That has made investors reluctant to hold Treasury bills coming due on Aug. 19 and neighboring dates, according to John Velis, Americas macro strategist at BNY. Prices of that debt have significantly cheapened compared with those of other bills.

“We would not be surprised to see late-August and early-September bills cheapen further as we draw closer to the ‘x-date,’” wrote Barry last week. Debt-ceiling brinkmanship has the potential to delay payments for Treasury bills.

Further fueling market anxiety has been the tendency of Congress to always wait until the 11th hour before finally raising the debt ceiling. None of this is helpful at a time when the market is worried that foreign investors will reduce their reliance on U.S. debt. Foreigners hold $9.013 trillion of U.S. debt—31.5% of the entire market—up from $8.3 trillion in the summer of last year.

The bill’s passage through the Senate does remove some degree of uncertainty, but the bond market was never deeply concerned about it anyway. Ten-year yields remain more or less where they were before the Senate voted “yes.”

Write to Karishma Vanjani at karishma.vanjani@dowjones.com.