The US and the world are seeing a new risk approach: the limit that Congress imposes on the total borrowing of the Treasury. This number, becoming chimerical, does not automatically increase when Congress authorizes additional expenses. This creates an opportunity for Congress to force the government to backtrack on commitments it has already made. The movie is not new. Investors are used to the same ending: a deal and a debt extension.

Just as it is difficult to predict natural disasters, it is difficult to predict how politicians will act. We should expect rational behavior, but this has not happened in the last two decades. Logic would have it that they reach an agreement well before a potential default, but in 2011 we came close to the catastrophe.

This year, a combination of harmful elements could change the movie’s end. The clearest market indicator came from US Treasury bills of less than one year. Therefore, these are the safest investments and the lowest return on investment. But the yield spread of three-month bills over one-month bills suddenly soared last week. This movement reflects uncertainty about the US’s ability to repay its debts at a time when debt risk will reach its peak.

Another interesting barometer is the default credit of US debt. The cost of insurance is usually meager. But this cost has become higher than in 2008, at the time of the Lehman Brothers bankruptcy, or after the debt ceiling crisis in 2011.

The problem is that it is a political risk, and, unfortunately, US politics has become unpredictable. It took four days and 15 rounds of voting for Republican representatives in January to gather the votes to elect Kevin McCarthy as Speaker of the House of Representatives. He partly won by agreeing to the demands of the Freedom Caucus not to raise the debt ceiling without negotiating spending cuts. Meanwhile, the Biden administration continues to refuse to enter into negotiations. Previous standoffs have had political blowback on the Republicans, and the Democratic administration already has its eyes set on the next presidential election.

McCarthy has prioritized maintaining cohesion within the Republican caucus, which means being able to pass laws without Democratic votes. If he fails to get the majority of his caucus on Board, the frightening possibility is that he could decide not to bring it to a vote. The risk of a political accident resulting in default is higher than in any previous debt ceiling impasse.

The measures taken by the Treasury to give politicians time to reach an agreement impact liquidity. US liquidity could tighten if the debt ceiling is duly raised. In this case, the US Treasury must rebuild its cash reserve. Indeed, Treasury cash balances tend to run down before debt ceiling deadlines, then spike sharply as soon as an agreement is reached. This means more volatility in US short-term rates.