U.S. Debt Default Warning Signals! CBO: Government Funds Depleted, "X-Date" Could Arrive by Mid-August!

TradingKey - On Monday, June 9th, the Congressional Budget Office (CBO) announced that if the debt ceiling remains unchanged, the U.S. government's ability to borrow through "extraordinary measures" might be depleted between mid-August and the end of September. This marks the anticipated arrival of the so-called "X-date" when a debt default could occur. 

Compared to the agency's March forecast, this latest projection for the "X-date" is delayed by at least two weeks, potentially providing Congress with additional time to agree on raising the federal debt ceiling, a part of Trump's tax reduction plan. 

The CBO stated that revenue and expenditure data from the past three months have "met expectations, reducing the likelihood of these measures being exhausted by early August."

Debt Ceiling Raised Repeatedly; Extraordinary Measures Keep Government Running

The current debt ceiling is set at $36.1 trillion and was reinstated on January 2nd this year. Since then, the Treasury has employed special accounting techniques to prevent breaching the limit while continuing to meet federal payment obligations on time. 

Prior to this, on June 3rd, 2023, then-President Joe Biden signed a law suspending the debt ceiling until January 1st, 2025, to avoid a default. 

The debt ceiling, established by Congress, sets the maximum amount the government can borrow to meet its financial obligations, originally intended to control deficits. 

However, in reality, Congress has consistently raised or suspended the debt ceiling whenever a default looms. Historically, the U.S. Congress first set a debt ceiling of $45 billion in 1939, and since then, it has been raised 103 times. 

"Extraordinary measures" are temporary accounting maneuvers by the Treasury to keep the government running when Congress fails to promptly raise or suspend the debt ceiling. 

Once these measures are exhausted without congressional action, the U.S. Treasury would be unable to make debt payments, leading to a default and the arrival of the "X-date."

Crisis Point: Debt Default or Running Out of Funds?

As the "X-date" approaches, Trump is concerned about "running out of money." On June 4th, Trump expressed on his social media platform, Truth Social, that the U.S. should abolish the debt ceiling system. He stated that “it is too devastating to be put in the hands of political people that may want to use it despite the horrendous effect it could have on our Country and, indirectly, even the World.”

This is tied to his ambitious tax plan. According to CBO analysis, this plan will cut taxes by $3.75 trillion while increasing the deficit by $2.4 trillion over the next decade. 

Industry experts and the U.S. bond market are evidently more worried about the risk of debt default. Citadel Securities President Jim Esposito warned on Thursday that "outstanding debt and the budget deficit are a ticking time bomb." He pessimistically stated, "In the long run, we can't solve this problem." 

Ray Dalio, founder of Bridgewater Associates, the world's largest hedge fund, also noted that the short-term risk of a U.S. debt crisis is low, but the long-term risk is significant. 

The bond market has already expressed concerns over a potential default. U.S. Treasuries started June poorly, with the yield curve rising across the board. The 30-year Treasury yield temporarily exceeded 5% and remains elevated around 4.9%, while the 10-year Treasury yield hovers at a high of 4.45%.

This week, the U.S. Treasury is set to auction several sets of bonds, including $58 billion in three-year notes on Tuesday, $39 billion in ten-year notes on Wednesday, and $22 billion in thirty-year notes on Thursday. The auction results will directly indicate market confidence in the U.S. fiscal situation.