The US debt ceiling crisis may be brought forward to February next year Wall Street warns that the government faces the risk of default as early as August

The Zhitong Finance App learned that Wall Street strategists warned that as the US Treasury raises borrowing expectations and plans to maintain record cash reserves, the US government may hit the statutory debt ceiling as early as February 2027, which is clearly ahead of previous expectations. At that time, the Ministry of Finance will have to initiate special accounting measures to avoid breaking through borrowing restrictions. And if Congress is unable to reach an agreement to raise or suspend the debt ceiling, the US government may face the risk of running out of funds in the second half of 2027.

Bank of America, Barclays, and Morgan Stanley strategists all anticipate that the Treasury may hit the debt ceiling from mid-February to late February next year. Previously, Bank of America had expected this point in time to be around May.

This forecast adjustment is mainly due to the financing requirements and cash balance targets recently announced by the US Treasury. Currently, the size of US government debt is less than 800 billion US dollars from the statutory limit of 41.1 trillion US dollars. According to the financing forecast announced by the Treasury Department last week, for the first quarter of 2027, that is, between January and March, the US government expects net borrowing of about 800 billion US dollars, which is roughly equivalent to the current remaining debt space.

Meanwhile, the Ministry of Finance anticipates that by the end of March 2027, its cash balance will reach 1 trillion US dollars, a record high for the year-end cash reserve target. Strategists believe that the Treasury's increase in its cash balance target may reflect the US government's increasing reliance on short-term treasury bills to finance fiscal expenses and deficits.

Since short-term treasury bills require more frequent principal repayments, the Ministry of Finance usually needs to maintain a more sufficient cash buffer to handle larger capital outflows during the month. However, maintaining a high cash balance also means borrowing more early, thereby draining the remaining debt ceiling space more quickly.

The debt ceiling may hit in February, and the time is expected to run out of government funds from August to November

It's important to note that hitting the debt ceiling does not mean that the US government immediately defaulted. If the National Assembly fails to raise or suspend the debt ceiling in a timely manner, the Ministry of Finance can still pass “special measures” to temporarily free up additional loan space in order to continue to fulfill the government's payment obligations.

Wall Street strategists estimate that such measures may provide the Treasury with an additional funding space of about 300 billion to 350 billion US dollars, thereby delaying the time when the government actually faces running out of funds.

Agencies including Sumitomo Mitsui Nikko Securities America Inc. anticipate that the US government may usher in the so-called “X Day” between August and November 2027.

“Day X” refers to the point in time when the Ministry of Finance is unable to continue to fulfill all financial payment obligations on time after exhausting cash reserves and funds that can be provided by special measures. At that time, if Congress still fails to act, the US government will face the risk of not being able to pay part of the debt or other expenses on time.

However, there is still great uncertainty about this time window, depending on future fiscal revenue, government spending, borrowing needs, and congressional policy actions.

Democrats control congressional debt ceiling negotiations may be more complicated

Political factors may further increase the uncertainty over the current debt ceiling issue. As the Democratic Party gained control of Congress in the US midterm elections, the market began to worry, and the Democrat-dominated Congress could fall into a long-term standoff with the Trump administration over federal borrowing.

Fitch Ratings warned last month that if the Democratic Party takes full control of Congress, the possibility that the US debt ceiling negotiations will fall into a political impasse will rise. However, Fitch pointed out that if the outgoing Republican-led Congress can raise or suspend the debt ceiling before the end of the term at the end of this year, it is expected that this risk will be reduced.

This means that whether the US Congress can make progress on the debt ceiling issue in the next few weeks will be an important variable affecting the 2027 fiscal financing environment.

The debt ceiling impasse could disrupt the US short-term financing market

In addition to the potential risk of government default, the debt ceiling issue may also have a clear impact on the liquidity of the US Treasury bond market and financial system. Historical experience shows that when the US government approaches the debt ceiling, the Treasury usually begins to use cash reserves and reduce the issuance of short-term treasury notes. This process will temporarily release liquidity to the banking system, increase bank reserves, and put downward pressure on overnight financing rates.

However, once the debt ceiling issue is resolved, the Ministry of Finance usually needs to rapidly increase the issuance of short-term treasury notes to supplement previously consumed cash reserves. Large-scale treasury note issuance will also absorb liquidity from the financial system, reduce bank reserves, and drive up short-term financing costs.

Therefore, even if the debt ceiling dispute is finally resolved, changes in liquidity before and after it may still cause significant fluctuations in the US money market.

If next year's debt ceiling negotiations are at an impasse for a long time, partial maturity US Treasury bonds may face additional selling pressure. In past debt ceiling crises, investors usually avoided short-term treasury notes with maturing dates close to the expected “X day” and instead bought securities maturing before or after that date.

This kind of trading behavior may cause the yield on partial treasury bonds to rise abnormally, causing the short-term treasury bond yield curve to be clearly distorted. However, at present, the US short-term treasury yield curve has not shown any clear signs of concern, reflecting that investors believe that it is still several months until the debt ceiling actually poses a threat.

Furthermore, if the debt ceiling dispute is unresolved, the Ministry of Finance may have to continue to rely on short-term loans to meet overall financing needs and delay plans to increase the issuance of medium- to long-term treasury bonds later next year.

Barclays strategist Samuel Earl said in a report to clients on Friday: “As the debt ceiling may have a significant impact on the money market next year, we will be closely monitoring the progress of the relevant legislative process in Congress over the next few weeks.”

Overall, the US debt ceiling issue is likely to become the focus of the market earlier than Wall Street previously anticipated. Although the Treasury Department is expected to be able to postpone capital exhaustion until the second half of 2027 through special measures, the uncertainty of debt ceiling negotiations may continue to affect the issuance of US Treasury bonds, short-term financing interest rates, and financial market liquidity as the political differences between the two parties intensify.

For investors, February 2027 may be an important time point when debt ceiling risk begins to show, and the potential “X-day” window from August to November will be a critical period for measuring the risk of US government fiscal payments.